NEW YORK (Reuters) - Oil prices dropped $2 on Wednesday, retreating from an all-time high above $98 a barrel, as speculators took profits from the record rally.

U.S. government data showing a slowdown in fuel demand in the world's largest energy consumer encouraged the selling, dealers said.

"Total product demand continues to take it on the chin with prices at lofty levels, a trend we picked up on in the summer," said Chris Jarvis of Caprock Risk Management.

U.S. crude dipped $2.08 to $94.62 a barrel by 1:26 p.m. EST, after surging to a record $98.62 earlier in the day. London Brent was down $1.45 at $91.81 a barrel.

Oil prices have surged about 40 percent since August as record weakness in the dollar, robust global demand and shrinking inventory levels attracted huge speculative investment.

Some analysts have said oil could climb above $100 a barrel in the coming days, even as day-to-day trade remains volatile.

On Wednesday, dealers said speculators were taking profits from the recent rally and eyeing soft demand figures.

In the past month, demand for fuel in the United States fell 0.4 percent from a year ago, the U.S. Energy Information Administration said in a weekly report.

The EIA added that crude stockpiles slipped by a smaller-than-expected 800,000 barrels last week to 311.9 million barrels, bringing inventories about 8 percent below a year ago.

Oil had gained momentum early Wednesday after the dollar plunged to new lows against the euro as credit market turmoil kept alive the prospects of another interest rate cut by the U.S. Federal Reserve.

The surge brought oil near the inflation-adjusted record peak of $101.70 hit in 1980, when war between OPEC producers Iran and Iraq ignited an oil supply crisis.

This time around, demand -- fueled by exploding growth in China and a steady increase from the United States -- has been a major driver behind oil prices more than quadrupling since 2002.

NEW ENERGY ORDER

Rapid demand growth will have China overtaking the United States as the world's top energy consumer soon after 2010, the International Energy Agency said Wednesday.

As oil closes in on $100, consumer governments are fretting over their economies and the IEA warned that oil could soar to a nominal $159 in 2030 with higher-than-expected demand growth.

"We are experiencing high oil prices today and, if actions are not taken in years to come, we can see a supply crunch, which is not good news for anybody, and it may end up with very high prices," IEA Chief Economist Fatih Birol told Reuters.

For now, however, supply and demand have taken a backseat to the role of financial investors when it comes to setting crude prices, according to the Organization of the Petroleum Exporting Countries, supplier of more than a third of the world's crude.

"Speculators do not make trends, they amplify them," Robin Batchelor of global asset manager BlackRock said.

Some market experts believe oil's advance is unsustainable.

"It only costs $55 to supply oil to the market," said Badung Tariono, fund manager of ABN AMRO's energy fund.

"I find a $5 to $10 premium on the production price due to geopolitical tensions, a cold winter or threats from OPEC acceptable, but that puts the fair value price at close to $60-$65."

(Additional reporting by Richard Valdmanis in New York, Jonathan Leff in Singapore and Hakan Ersen in Frankfurt; Editing by Jim Marshall)