Crude oil futures climbed more than 1% Thursday as rising worries over geopolitical risk and expectations of tightness in Q3 outweighed a surprise increase in U.S. crude and gasoline inventories.

Cross-border tensions between Israel and Hezbollah in Lebanon have been escalating, fanning fears of a widening war, and analysts say any contagion could impact crude supplies from the Middle East.

Oil prices appear headed for their first monthly gain since March but remain "trapped within a range," FXTM analyst Lukman Otunuga told Marketwatch. "Bulls have been supported by geopolitical tensions and hopes for a rebound in demand thanks to the summer driving season."

Front-month Nymex crude (CL1:COM) for August delivery settled +1% at $81.74/bbl, and front-month August Brent crude (CO1:COM) closed +1.3% to $86.39/bbl.

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Citi analysts say renewed tensions in the Middle East and Russia-Ukraine provide potential for upside to oil prices, and that balances would need to loosen meaningfully before any significant downside pressure.

But oil markets this year have shown a propensity to overshoot "either on the back of geopolitical fears or supply and demand expectations, before sharply recalibrating thereafter," Citi said, so "we recommend not to chase this rally as current price levels look too rich to us."

Citi still sees an average Q3 oil deficit of 200K bbl/day, but notes uncertainty around China as refinery runs there have been revised lower.

"What is also striking is that the key catalysts for healthy summer oil markets, namely a strong pull from east of Suez and a hot gasoline market, appear rather muted so far, perhaps underscoring the fragile nature of the current bullish sentiment," the bank said.