UPDATE 2-Gold finds support from inflation fears over oil

(Adds more details, updates prices)

By James Regan

SYDNEY, May 20 (Reuters) - Gold was well supported above $900 an ounce on Tuesday as strong oil prices sparked fresh inflation concerns, outweighing a report of a quarterly drop in world gold demand to the lowest figure in half a decade.

At 0702 GMT, spot gold <XAU=> cost $908.70/909.70 an ounce, versus $905.00/906.40 late in New York, just shy of Monday's intraday high of $913.35 an ounce, the highest since April 23.

"Gold scaled a near-four-week peak on the back of speculative buying as strong oil prices fanned fears of inflation," Investec Resources analyst Darren Heathcote said in a report.

A modest easing in the value of the U.S. dollar <JPY=> against the Japanese yen was also encouraging buying of gold, countering some profit taking, according to dealers.

But gold was taking its main cue from expensive oil, which typically lifts bullion's appeal as a hedge against inflation.

"The oil price has brought out the gold speculators who are banking on inflation going up," a precious metals dealer at an Australian bank said.

Oil has extended its rally past $127 a barrel to within sight of Friday's record, driven by renewed concerns of supply disruptions and OPEC's reluctance to raise output. [nSP39569]