By Alex Lawler and Deep Kaushik Vakil

LONDON (Reuters) -Oil steadied on Tuesday as weakness in the physical market countered concern about conflict in the Middle East as Israel stepped up attacks in southern Gaza and a ceasefire deal between Hamas and Israel hung in the balance.

The Israeli military seized control of the Rafah border crossing between the Gaza Strip and Egypt and its tanks pushed into the southern Gazan town of Rafah, as mediators struggled to secure a ceasefire agreement.

futures were down 30 cents, or 0.4%, at $83.03 a barrel by 1130 GMT while U.S. West Texas Intermediate (WTI) crude futures fell 27 cents, or 0.3%, to $78.21.

“Truce remains elusive, and even if it is reached the question remains whether Houthi hostilities in the Red Sea would cease and the Suez Canal would reopen, significantly mitigating the risk of shipping throughout the region,” said Tamas Varga of oil broker PVM.

“I believe the lack of optimism of the past few days is more the result of genuine weakness in the physical markets.”

In a sign of easing concern that supply could tighten, the first-month Brent contract’s premium to the six-month contract slipped to $2.89 a barrel for its lowest since mid-February.

“Trying to use geopolitics as an excuse to buy crude oil has become an increasingly futile and costly affair for traders in recent months,” said Ole Hansen of Saxo Bank, adding that the drop in crude spreads highlights “a well supplied market, leaving the upside capped for now”.

Last week Brent and WTI had registered their steepest weekly losses in three months as the market focused on weak U.S. jobs data and the possible timing of a Federal Reserve interest rate cut.

A stronger dollar also weighed, making crude more expensive for traders holding other currencies.

As well as Middle East tensions, the latest U.S. inventory reports will also be in focus.

oil and product stockpiles were expected to have fallen last week, a Reuters poll showed. Crude inventories could have fallen by about 1.2 million barrels in the week to May 3, based on analyst forecasts. [EIA/S]

Saudi Arabia’s move to raise official selling prices for its crude sold to Asia, Northwest Europe and the Mediterranean in June also supported prices, signalling expectations of strong demand this summer.