You are right to point towards the way in which Owen's poetry was fundamentally changed by his experiences of war. Certainly the poem "Dulce et Decorum Est" is a perfect example of this and how it operated. This poem focuses on realism rather than Romanticism, and the naive fantasies of young men believing that it was noble to fight in battle are brutally eviscerated through his sparse poetry and realistic descriptions.
I think that this question cannot be answered in a universal manner. For some, reality and fancy simply cross too many times in ones life for a specific distinction to be made. Realistically, what is wrong with fancy paralleling reality?
That being said, sometimes we need to believe in fancy in order to stay grounded in reality.
Owen is one of those unfortunate men who have lost the fantasies in the reality of war. Dulce et Decorum Est shows us how this happens to soldiers. I think it is fairly easy to distinguish between fantasy and reality, especially in this poem. Owen's earlier works deal with a more idealistic, naive view. His later poems show the harsh truth of life during a time of war. Although after seeing such atrocities, perhaps even his later views are tainted by an unrealistic darkness. Maybe the real reality is somewhere in the middle.
Firstly, just a minor point, but your post suggests that Owen made it through the war. He didn't. He went to the front as a soldier and had to be shipped home after a nervous breakdown. Then, after recovering, he appears to have gone functionally insane towards the end of the war and returned to the fighting believing himself to be invincible. He was shot a few days before the end of the war and, in a poetic irony to painful to imagine, his mother was told of his death on the first day of peace.
His experiences in the trenches were horrifically real and I think his war poems are firmly based in reality. And the ever lasting power of his words are due to the fact they contain the ring of truth. I can't read Dulce and Decorum Est without being overcome with emotion. It is one of the most powerful things ever written in my opinion.
I think that through our reading pf the poem it is clear that man can not just sit in his cosy house and speak about a thing that can not be perceived unless it is experienced. How can one really assess what war looks like while one have not gone through its oredeals, fantacizing about war, in my opinion, is really dangerous because by doing so people's minds are filled with fancies and romantic ideas, avoiding them from assessing things realistically.
However, I see that it is really ironic that what we discern upon reading realistic experiences is something that is instigated deeply in our emotions and feelings, we respond emotionally to realistc things, yet we risk a great deal if we base our judgements on that.