LONDON (Reuters) -Oil prices edged lower on Thursday, retreating from the previous session's multi-month highs, with investors taking profits as demand caution remained in focus despite last week's decline in U.S. inventories.

Brent crude futures were down 43 cents, or 0.49%, at $86.91 a barrel by 0855 GMT while U.S. West Texas Intermediate (WTI) crude futures fell 49 cents, or 0.58%, to $83.39 in trade thinned by the U.S. Independence Day holiday.

In the previous session, Brent gained 1.3% to settle at $87.34 for its highest since April 30. WTI, meanwhile, had settled at an 11-week high of $83.88.

Those gains followed a larger than expected decline in U.S. crude stocks. The U.S. Energy Information Administration (EIA) reported a 12.2 million draw in inventories. Analysts polled by Reuters had expected a draw of 680,000 barrels.[EIA/S]

Given dollar weakness and a brighter outlook for U.S. fuel demand after the EIA data, Thursday's price weakness is not expected to last, said PVM analyst Tamas Varga.

The drop in oil prices on Thursday morning is partly attributable to traders taking profits after recent gains, said OANDA analyst Kelvin Wong.

However, German industrial orders fell unexpectedly in May, adding to signs that a recovery for Europe's largest economy remains elusive.

Demand concerns were heightened by U.S. data showing that first-time applications for U.S. unemployment benefits increased last week while jobless numbers also rose.

Countering that, weaker economic data could hasten interest rate cuts by the U.S. Federal Reserve, analysts said, which could be supportive for oil markets.

Softer U.S. data has already prompted markets to lift the probability of a September rate cut to 74% from 65%.

Swiss bank UBS expects Brent crude to reach $90 a barrel this quarter, it said in a note to clients, citing OPEC+ production cuts and projected declines in oil inventories.