Brent crude futures dipped on Thursday after five days of gains, slipping under $122 a barrel on concerns that strong prices could crimp demand and as some central banks start moving to control inflation.

Brent crude shed 35 cents to $121.95 a barrel by 6:09 a.m. EDT. It hit a 2-1/2-year high above $123 on Wednesday, driven by violence in the Middle East.

U.S. crude futures were flat at $108.83 a barrel after touching $109.15 on Wednesday, their highest level since September 2008.

The market focus is on a European Central Bank meeting later in the day. Analysts polled by Reuters expect to see a 25 basis point interest rates increase from a record low of 1.0 percent.

At current crude oil prices, the risk is turning more and more to the amount of potential demand destruction, Petromatrix's Olivier Jakob said.

Should the ECB surprise the market by not hiking rates, a dollar rebound would see a pullback across most commodities, analyst Andrey Kryuchenkov from VTB Capital said.

Oil prices slipped even after rebels said Muammar Gadaffi damaged a pipeline connecting oilfields to the port town of Marsa el Hariga. Analysts noted the supply disruptions may have already been priced in.

We can't possibly justify a further sustained boost to prices unless unrest erupts in an oil-producing country other than Libya with serious threats to crude supplies, Kryuchenkov added.

Euro zone debt worries and inflation were high on the agenda after Portugal overnight asked for a EU bailout and on concerns that a rise in euro zone interest rates would push up the cost of debt for already highly indebted economies.

In Asia, China's central bank lifted interest rates this week for the fourth time since October as it ramps up the battle against inflation.

The strong crude future prices have pushed up prices at the pump globally, further exacerbating the inflationary pressure governments face from the rising cost of food and raw materials.

Current price levels should have a negative impact on demand, said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments.

The International Energy Agency said on Wednesday that the current oil price is harming global economic growth and is a mounting concern for consuming nations.

Saudi Arabia and the United Arab Emirates have raised output to compensate for supply loss from Libya, but there has been no coordinated supply policy response from OPEC to rein in high prices.

The nature of this lack of response and general drift of recent policy statements suggests that producers are a long way from seeking actively to bridle in the upside for prices, leaving the door to $130 Brent swinging open, analysts at Barclays Capital led by Paul Horsnell said in a note.


On the data front, U.S. weekly jobless claims, due later in the day, are expected to have dipped to 385,000 in the week ended April 2. The recent decline in filings for unemployment benefits has coincided with faster job growth.

On Wednesday, weekly U.S. government data showed that gasoline demand at the world's top oil consumer fell 1.2 percent from year-ago levels as prices at the pump neared $3.70 a gallon.

Gasoline demand should pick up as the U.S. driving season begins, but high prices would temper growth in consumption.

(U.S.) demand will be challenged as higher retail prices and little wage growth lead to a rising burden of gasoline spending in U.S. households' budget and disposable income, Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said in an overnight note.

Gasoline stocks fell less than forecast, while a rise in crude oil stocks was in line with expectations.

(Additional reporting by Florence Tan in Singapore; editing by Jason Neely and Jane Baird)