Updates prices, adds detail, background, analyst comment and changes dateline to London

By Shadia Nasralla

LONDON, May 20 (Reuters) - Oil prices lost about 1% on Wednesday after U.S. President Donald Trump again asserted that the Iran warwill end "very quickly", though investors remain wary about the outcome of peace talks as disruption to Middle Eastern supply continues.

Brent crude futures LCOc1 fell $1.52, or 1.4%, to $109.76 a barrel by 0831 GMT and U.S. West Texas Intermediate futures CLc1 were down $1.36, or 1.3%, at $102.79.

"Prices are likely to still exhibit some upside potential even if a deal is concluded, given that supply will likely not return to pre-war levels immediately," said LSEG research analyst Emril Jamil.

Both benchmarks fell nearly $1 on Tuesday after U.S. Vice President JD Vance said that the U.S. and Iran had made progress in talks.

Trump had earlier said that the United States may need to strike Iran again and had been an hour away from ordering an attack before its postponement.

Citi said on Tuesday that it expects Brent crude to rise to $120 a barrel in the near term, stating that oil markets are underpricing the risk of a prolonged supply disruption.

Similarly, PVM analysts said global oil stocks could reach critically low levels. "Yet, as observed lately, market players are comparatively nonchalant (or complacent) about what the conflict might bring," PVM said.

The premium on Brent contracts for delivery next month over contracts for delivery in six months LCOc1-LCOc7 - an indicator of traders' views of current supply tightness - is around $21 a barrel, way below last month's highs above $35.

Two supertankers left the Strait of Hormuz on Wednesday while another makes its way out after waiting for more than two months with 6 million barrels of Middle Eastern crude oil on board. The number of vessels crossing the strait remains well below the 130 or so ships that crossed daily before the war.

To make up the supply shortfall, countries are relying on commercial and strategic inventories.

In the U.S., crude oil inventories fell for a fifth straight week last week, according to market sources citing American Petroleum Institute data. Fuel stocks also fell. API/S

U.S. crude stockpiles reported by the Energy Information Administration are expected to have fallen by about 3.4 million barrels, a Reuters poll showed. The weekly EIA data is due at 1430 GMT. EIA/S

In another sign of the increasing supply crunch, Britain has watered down sanctions to allow imports of diesel and jet fuel refined abroad from Russian crude.