NEW YORK (CNNMoney.com) -- Oil prices fell from record highs Monday, closing almost $2 lower, as violence between Israel and Lebanon-based Hezbollah did not expand as feared to neighboring oil-producing states.

U.S. light crude for August delivery slid $1.73 to settle at $75.30 a barrel on the New York Mercantile Exchange.

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While neither Israel or Lebanon produces much oil, apprehension abounds that the conflict will spread to the broader region, which produces 30 percent of the world's oil and holds 60 percent of its reserves.

"Traders took it as a sign of relief that oil is still flowing out of Iran," said Phil Flynn, an analyst at Alaron Trading in Chicago. "We came in on Monday and, what do you know, the world is still here."

But one analyst said the price drop may be a little too much, a little soon.

"It seems to me a bit of an overreaction by the market," said Kevin Norrish, a commodities analyst at Barclays in London. "The idea that this can be sorted out very quickly with no broader implications for the Middle East is optimistic."

The contract hit a record trading high last week at $78.40 as violence flared between Israel and Lebanon and rattled markets already nervous over North Korean missile tests, Iran's nuclear program, fighting in Iraq and Nigeria, and a tight supply and demand situation.

Iran is a cause of particular concern. The country is widely believed to support the Hezbollah fighters that Israel is currently chasing in southern Lebanon and may be supplying the rockets now hitting Israeli cities.

Iran is the world's fourth-largest oil producer and sits astride the narrow Strait of Hormuz, through which one-quarter of the world's oil passes on its way to market.

The country is also involved in a separate dispute with the West over its nuclear program, which it says is for peaceful power-generating purposes but which many believe is intended to produce a bomb.

Last week hopes of a breakthrough were dashed after Iran failed to respond to an incentive package intended to curb its nuclear development, prompting calls for the country to be referred to the United Nations Security Council for possible sanctions.

The impasse helped drive oil prices higher on fears Iran would respond to any sanctions by curtailing its oil exports.

Rumors circulated Monday that Iran may accept the incentives.

Nauman Barakat, an energy trader at the investment bank Macquarie, believes Iran is simply playing hardball before Aug. 22, its own deadline for responding to the incentives.

"When push comes to shove, I expect the Iranians to fudge a yes," Barakat said.

And the Middle East is just one region where trouble is afoot. Ongoing violence in Nigeria, sparked by fighters from the county's impoverished oil-producing region who want a larger share of the nation's oil wealth, and North Korea's recent long-range missile test also caused oil prices to rise.

Analysts have said the market is much more sensitive to geopolitical concerns than it used to be. That's because limited new oil supplies coupled with surging demand have reduced the world's spare production capacity from about 5.5 million barrels a day a few years ago to around 1 million barrels a day currently.

That means a supply disruption from, say, Iran, which produces about 4 million barrels a day, or Nigeria, which produces about 2.5 million barrels a day, could not be met by other oil-producing countries.

Also driving last week's record prices were reports of unabated demand despite sky-high costs.

Norrish expected oil to remain near the $75 a barrel mark even if the Israeli-Lebanese conflict is settled.

"The fundamentals have been tightening for a long time," he said. "Demand is much stronger than anyone thought it would be."

-- CNNMoney.com's Chris Isidore contributed to this report.

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