Oil settles lower as traders gauge Middle East tensions

• Oil prices close lower after hitting two-month high on Wednesday
• Market focusing on Middle East tensions, US-Iran talks
• US, Iranian officials to meet on Sunday in Oman

NEW YORK, June 12 (Reuters) - Oil prices settled slightly lower on Thursday as traders booked profits from a 4% rally in the prior session, driven by concerns that worsening tensions in the Middle East could cause supply disruptions.

Brent crude futures LCOc1 settled down 41 cents, or 0.6%, at $69.36 a barrel. U.S. West Texas Intermediate crude CLc1 fell 11 cents, or 0.2%, to settle at $67.97 a barrel.

U.S. President Donald Trump on Thursday said an Israeli strike on Iran "could very well happen," but added that he would not call it imminent and prefers to avoid conflict.

The U.S. had earlier decided to move personnel out of the Middle East, sending both crude oil benchmarks up more than 4% to their highest since early April on Wednesday.

The surge put the market in overbought territory based on several technical indicators, so it was likely due for a brief correction, StoneX Energy analyst Alex Hodes said.

U.S. and Iranian officials were scheduled to hold a sixth round of talks on Tehran's uranium enrichment programme in Oman on Sunday, according to officials from both countries and their Omani mediators.

Trump has repeatedly threatened strikes against Iran if the nuclear talks fail to reach an agreement. Tehran, which asserts its nuclear activity is for peaceful purposes, has said it would retaliate against strikes by hitting U.S. bases in the region.

Rising tensions in the region have oil traders worried about possible supply disruptions.

Britain's maritime agency warned on Wednesday that increased tensions in the Middle East may escalate military activity and impact shipping in critical waterways.

"For the oil market, the absolute nightmare is a closure of the Strait of Hormuz," Arne Rasmussen, an analyst at Global Risk Management, said in a LinkedIn post.

"If Iran blocks this narrow chokepoint, it could affect up to 20% of global oil flows," he added.

JPMorgan said oil prices could surge to $120-$130 a barrel if the Strait of Hormuz were to be shut, a scenario the bank considered to be severe but a low risk.

Still, oil traders were growing cautious.

"We are still higher than two days ago as some short investors prefer to stay on the sidelines amid the uncertainty," said Giovanni Staunovo, an analyst at UBS.

U.S. special envoy Steve Witkoff plans to meet Iranian Foreign Minister Abbas Araghchi in Oman on Sunday to discuss Iran's response to a U.S. proposal for a deal.

The U.N. nuclear watchdog's 35-nation Board of Governors declared Iran in breach of its non-proliferation obligations on Thursday for the first time in almost 20 years, raising the prospect of reporting it to the U.N. Security Council.