*

Israeli forces take control of vital Rafah crossing

*

US crude, product inventories expected to fall last week

*

Saudi Arabia hikes official selling prices in June

(Updates prices, adds quote, changes dateline to LONDON)

By Alex Lawler

LONDON, May 7 (Reuters) - Oil edged up on Tuesday after

Israel struck Rafah in Gaza and talks for a ceasefire hung in

the balance, maintaining the support that the market has gained

from heightened Middle East tensions and risk to supplies.

Palestinian militant group Hamas on Monday agreed to a Gaza

ceasefire proposal from mediators, but Israel said the terms did

not meet its demands and pressed ahead with strikes in Rafah

while planning to continue negotiations on a deal.

Brent crude futures rose 21 cents, or 0.3%, to

$83.54 a barrel by 0810 GMT while U.S. West Texas Intermediate

(WTI) crude futures were up 1 cent at $78.49.

"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.

On Monday crude settled higher, partly reversing last week's

drop. Both contracts 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.

Yeap Jun Rong, market strategist at IG, said oil's opening

gains on Tuesday reflected "some roadblocks in the ceasefire

talks between Israel and Hamas leading market participants to

price for geopolitical tensions to potentially drag for longer".

A stronger dollar capped gains, 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.

U.S. crude 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.

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.

(Reporting by Alex Lawler

Additional reporting by Andrew Hayley and Jeslyn Lerh

Editing by David Goodman

)