UPDATE 5-Oil edges higher as dollar drops

© Reuters. UPDATE 5-Oil edges higher as dollar drops

* Softer dollar helps oil edge up

* U.S. crude stocks rise against expectations

* OPEC members say price drop will be short-term (Updates prices)

By Amanda Cooper

LONDON, July 23 (Reuters) - Oil prices edged higher on Thursday, aided by a drop in the dollar, although rising supplies of crude oil in the United States kept the futures market in a tight range.

Crude oil stocks in the United States rose by 2.5 million barrels last week to above the five-year seasonal average, according to data from the Energy Information Administration (EIA), trumping expectations for a drop of 2.3 millions.

U.S. September crude futures CLc1 were 31 cents higher at $49.50 by 1401 GMT, having fallen by $1.67 on Wednesday to settle below $50 for the first time since April.

Brent crude LCOc1 was up 11 cents at $56.24 a barrel.

The price of Brent has fallen by about 12 percent in July, its largest monthly fall since March, pummelled by concern about the ability of the global economy to absorb a surplus of oil.

The oil glut looks set to grow as an Iranian nuclear deal with the West is expected to release millions of barrels of additional supply onto world markets. ID:nL1N1002DS

"The issue is the surplus in oil rising despite (evidence of seasonal demand) so (oil) is finding some pressure coming from that surplus," Natixis energy analyst Abhishek Deshpande said.

"Brent is overvalued for now at $56 and a surplus of 2 million barrels per day ... had the market been balanced, I would say $60 is required."

Adding to the prospect of this surplus persisting, OPEC delegates from Gulf states and other nations say that the recent drop in prices is likely to be short-term. They say that lower prices will not deter the cartel from keeping output high to defend market share. ID:nL5N10139W

The dollar headed for its first weekly loss in a month .DXY but held near a three-month high, which tends to make it more profitable for non-U.S. investors to sell dollar-denominated assets such as oil or gold.

"Fundamentally, there's not a lot to change the picture dramatically in the short term. Prices seem to be contained in a range for now," said Ben Le Brun, market analyst at OptionsXpress in Sydney.

Volatility in the oil price has calmed this week. Brent has seen a difference of only $1.54 between this week's intraday high and low, the narrowest range since the last week in 2013.