Oil headed for weakest first-half performance in two decades

By Amanda Cooper

LONDON (Reuters) - Oil was mostly flat on Wednesday, after paring earlier losses, but was set for its biggest price drop in the first half of the year since 1997, a sign that investors are discounting evidence that major producers are sticking to a deal to cut output.

August Brent crude futures were up 8 cents at $46.10 a barrel by 1258 GMT, having fallen earlier to seven-month lows at $45.53.

U.S. crude futures were up 14 cents at $43.65, having hit their lowest since September on Tuesday.

So far this year, oil has lost 20 percent in value, its weakest performance for the first six months of the year since 1997.

Compliance with an agreement by the Organization of the Petroleum Exporting Countries and other producers to cut output by 1.8 million barrels per day from January reached its highest in May since the curbs were agreed last year.

Yet global inventories of both crude and refined products remain well above their long-term averages.

Iranian oil minister Bijan Zanganeh said on Wednesday OPEC members were considering deeper cuts in output, but should wait until the effect of the current level of production was clear.

"One thing we need to see is Iran getting more on side with the rest of OPEC to increase the effectiveness of the deal and that effectiveness is in a shambles at the moment," London Capital Group senior market analyst Jasper Lawler said.

"This isn't one of the most volatile declines (in price). But in a way, I think that maybe makes it more durable ... this enduring downtrend might be more consistent."

Data from the American Petroleum Institute on Tuesday showed U.S. crude stockpiles last week had dropped more than forecast. Gasoline and distillate inventories rose. [API/S]

A government report on inventories is due at 10:30 a.m. EDT (1430 GMT) on Wednesday and the official figures often differ sharply from those of the industry group.

OPEC and non-OPEC oil producers' compliance with the output deal reached 106 percent in May, a source familiar with the matter said on Tuesday. That means they cut output by more than they were required to do.

OPEC compliance with the curbs was 108 percent, while non-OPEC compliance was 100 percent, the source said. Another source confirmed compliance by all producers in May was 106 percent.

While compliance is high, it is what went on before the production cut that counts, BMI Research said in a note.

"A number of producers - notably Iraq, Saudi Arabia and Russia - aggressively ramped up output in the run-up to the deal, fast-tracking projects, expanding drilling programmes and deploying spare capacity," BMI said.

(Additional reporting by Aaron Sheldrick in TOKYO; Editing by Adrian Croft and Jane Merriman)