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Oil futures fall as fears of a wider Middle East war fade

FILE PHOTO: Illustration shows Oil barrels in front of rising stock graph

By Erwin Seba

HOUSTON (Reuters) - Oil futures fell on Monday as traders focused on market fundamentals, seeing little near-term risk that the Middle East conflict would impact supply.

Brent crude futures settled at $87.00 a barrel, down 29 cents, or 0.33%. U.S. West Texas Intermediate crude finished down 29 cents, or 0.35%, at $82.85 a barrel.

Traders see a tightening supply-demand balance in the coming months, said Phil Flynn of Price Futures Group.

"The fundamentals on oil are strong," Flynn said. "The expectation is the markets are going to tighten this summer on the supply side."

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Geopolitical risk premiums tend not to last if supply is not actually disrupted, said UBS strategist Giovanni Staunovo, adding that the high spare capacity of a few oil-producing countries could compensate for any supply disruptions.

A protracted oil rally could happen if the Strait of Hormuz, the world's most important oil artery, was disrupted or Saudi Arabia directly drawn into the conflict, said Tamas Varga of oil broker PVM.

Meanwhile, plentiful supplies of some of the biggest crude grades are limiting the conflict's impact on oil futures, a Reuters analysis found.

On the economic front, inflation is back in focus, with comments from Federal Reserve officials and a run of hotter-than-expected inflation data forcing a paring back last week of expectations of interest rate cuts.

Economic concerns have again become a bearish factor in the crude market, with prices under pressure due to a large build in the U.S. stockpile and a hawkish Fed that has led to a strong dollar, said Tina Teng, an independent market analyst. [EIA/S]

A strong dollar makes oil more expensive for holders of other currencies. [USD/]

(Reporting by Erwin Seba; Additional reporting by Deep Vakil in Bengaluru, Natalie Grover in London, Colleen Howe in Beijing and Jeslyn Lerh in Singapore; Editing by Alexander Smith, Paul Simao and Lisa Shumaker)