SINGAPORE (Reuters) -Oil prices fell on Monday after posting their steepest weekly rise in over a year last week as oversupply concerns amid softer demand countered the worries of a wider Middle East war disrupting exports in the key producing region.

Brent crude futures fell 31 cents, or 0.4%, to $77.74 per barrel by 0435 GMT. U.S. West Texas Intermediate crude futures slipped 20 cents, or 0.27%, to $74.18 per barrel.

Brent rose by over 8% last week, the biggest weekly gain since January 2023, while the WTI contract gained 9.1% week-on-week, the most since March 2023, on expectations that Israel could strike Iranian oil infrastructure in response to an Iranian missile attack on Israel on Oct. 1.

However, as the Israeli response is still developing, some investors likely sold futures to lock in their gains from the previous week's rise.

"Technical profit-taking seems to be the most logical explanation", said Priyanka Sachdeva, senior market analyst at Phillip Nova, on Monday's softening in oil prices.

Still, oil markets are bound to experience tailwinds amid fears of Israel's retaliation on Iran, as the potential mass-scale escalation of conflict in the Middle East has countered mounting demand-side pressures, Sachdeva said.

Israel bombed Hezbollah targets in Lebanon and the Gaza Strip on Sunday ahead of the one-year anniversary of Hamas' Oct. 7 attacks on Israel that triggered the current war between Israel and the Iranian-backed militant groups. Its defence minister also said all options were open for retaliation against Iran.

Last week, Iran launched a missile attack on Israel in response to Israel's recent attacks on Hezbollah in Lebanon and its prolonged incursion in Gaza against Hamas following its Oct. 7 attack.

However, ANZ Research cautioned on Monday that despite the rally in oil prices last week, the impact of the conflict on oil supply will be relatively small.

"We see a direct attack on Iran's oil facilities as the least likely response among Israel's options," it said.

"Moreover, we have seen a diminished impact of geopolitical events on oil supply. This has led to a significantly smaller geopolitical risk premium being applied to oil markets in recent years, and OPEC's 7 million barrels per day of spare capacity provides a further buffer."

The Organization of the Petroleum Exporting Countries (OPEC) and its allies including Russia and Kazakhstan, a grouping known as OPEC+, has millions of barrels of spare capacity since it has been cutting production in recent years to support prices amid weak global demand.

The producer grouping has enough spare oil capacity to compensate for a full loss of Iranian supply if Israel knocks out that country's facilities, but it would struggle if Iran retaliates by hitting the installations of its Gulf neighbours, according to analysts.

At its last meeting on Oct. 2, OPEC+ kept its oil output policy unchanged including a plan to start raising production from December.

Combined with the uncertain pace of the economic recovery in top crude importer China, the production hike can easily shield the market from supply disruptions and continues to limit the upside in oil prices, said Phillip Nova's Sachdeva.