Oil was little changed below $126 on Wednesday, with traders awaiting an expected rebound in weekly US distillate stocks and still on edge over the previous day's report that Iran was considering a proposal to cut output.

US light crude for June delivery was down 1 cent at $125.79 a barrel by 0252 GMT. It surged to a seventh consecutive record high on Tuseday, hitting $126.98 a barrel before profit-taking pared the day's gains.

London Brent crude fell 16 cents to $123.94.

'The upward trend is still alive. The news about Iran is creating uncertainties and should keep crude oil prices buoyant,' said Shuji Sugata, manager Mitsubishi Corp Futures and Securities Ltd in Tokyo.

Iranian President Mahmoud Ahmadinejad said a proposal to reduce the country's crude output was being reviewed by experts, the semi-official Fars News Agency reported on Tuesday.

Iranian Oil Minister Gholamhossein Nozari earlier said Iran was reviewing how much oil it pumps, but no decision had been taken on any changes and it was unclear what had prompted discussion of such a move.

Iran's production topped 4.2 million barrels per day (bpd) in March, nearly 5 percent of global supply and its highest since the 1979 Islamic revolution.

The supply threat added to a global market already uneasy over supplies of distillates like heating oil and diesel fuel. US heating oil futures settled on Tuesday at a record $3.6989 a gallon, driving the entire oil complex higher.

'We have to watch the outcome of US oil inventory data to determine the near-term trend as both crude and oil products stocks are expected to rise,' Sugata said.

European middle distillate stocks fell sharply in April to 361.28 million barrels, down 1.4 percent from March and 7.2 percent lower than a year ago, data from industry monitor Euroilstock showed on Tuesday.

Traders were awaiting the latest US weekly data for more direction, after an unexpected fall in distillates stocks last week left them at 105.7 million barrels, the lower half of the normal range for this time of the year.

'Distillates are clearly driving the market and US distillate inventories will have to be watched this week. But large investment flows are also driving the market,' said Marc Lansonneur, Societe Generale's head of commodities derivatives in Asia.

Analysts expect distillates stocks to have risen by an average 800,000 barrels last week, according to a Reuters poll. Gasoline stocks are seen unchanged and crude oil socks could rise by 1.8 million barrels, their fourth increase in a row. The US Energy Information Administration will release its inventory report for the week to May 9 on Wednesday at 10:30 am EDT (1430 GMT). - Reuters