Oil prices dipped on Wednesday as traders took profits from the previous session's rally to a new record high above $88 a barrel.

The surge, driven by an inflow of investor money, tension in northern Iraq and tight fuel supplies in the United States, has taken prices near their inflation-adjusted peak of 1980.

U.S. officials fear damage to an economy already coping with fall-out from the subprime loan crisis.

After surging more than 10 percent in six straight days of gains, U.S. crude fell 31 cents to $87.30 at 5:20 a.m. EDT. Prices gained $1.48 on Tuesday and touched a new intra-day high of $88.20, their third record peak in a row.

London Brent crude fell 35 cents to $83.20.

The market is still very much focused on the Turkey-Iraq tensions for the short-term but I believe it is overvalued by at least $10 and will probably come off within the week, said Makoto Takeda of Tokyo's Bansei Securities.

The Turkish parliament is expected on Wednesday to grant its troops permission to launch an attack inside Iraqi territory, despite international pressure not to.

The tensions are seen as dimming hopes for a recovery in Iraqi oil exports via Turkey, which have been sporadic since 2003, but traders say the greater fear is the risk of unsettling the Middle East region, which pumps a third of the world's oil.

The impact of the geopolitical risk was magnified by concerns that OPEC's 500,000 barrels per day (bpd) output rise may be too little too late to maintain healthy supplies through the winter, with refiners revving up to meet peak demand.

Even when they start pumping in November, it's not much, I'm surprised they're not coming under more pressure, said Dariusz Kowalczyk, chief investment strategist at CFC Seymour.

U.S. crude stocks are expected to rise another 900,000 barrels in weekly data due for release later on Wednesday, while distillate inventories -- which include heating fuel -- should ease by 400,000 barrels, a Reuters poll found.

The U.S. Energy Information Administration (EIA) said on Tuesday the market needed additional OPEC oil.

The Organization of the Petroleum Exporting Countries blames speculators for driving up prices.

Oil prices have more than quadrupled since 2002 on the back of surging demand from developing economies.

(reporting by Yaw Yan Chong)

Iraq OPEC