Oil prices rise on Middle East fighting; OPEC output in focus

By Henning Gloystein

SINGAPORE (Reuters) - Oil prices edged up on Monday following fighting in Iraq and Yemen, but Iranian comments that OPEC was unlikely to cut output as well as signs of strengthening U.S. production capped gains.

Front-month Brent futures were up 12 cents at $66.93 a barrel by 0556 GMT. U.S. crude rose 26 cents to $59.95.

Prices were supported by concerns that conflict in Iraq and Yemen could disrupt supplies after Islamic State militants said they had taken control of the Iraqi city of Ramadi in a big blow to the government.

In Yemen, a Saudi-led coalition resumed air strikes against Houthi militia in Aden, a port-city on the shores of key Middle East oil routes.

Despite these Middle East conflicts, analysts said oil markets remained oversupplied, and that the glut could worsen if U.S.-production picked up and output by producer-club OPEC remained strong.

"Oil prices appear to have outpaced the improvement in underlying fundamentals," Barclays said on Monday.

"We expect selling interest in the $65.00/67.00 area to cap WTI crude oil ($70.00/$72.00 area for Brent crude) and look for a move lower in range over the coming weeks. Our downside targets for WTI and Brent are $54.24 and $63 respectively."

Iran's Deputy Oil Minister Rokneddin Javadi told Reuters on Monday that OPEC was unlikely to cut output at its next meeting in June, and that Iran hoped its crude exports would return to pre-sanctions levels of 2.5 million barrels per day (bpd) within three months once a deal to lift an oil embargo is finalised.

A deal over Iran's disputed nuclear programme between Tehran and world powers could see sanctions on Iran lifted if a more permanent pact is finalised in June. Because of the sanctions, Iranian oil exports have fallen to about 1 million bpd since 2012, mainly to Asia.

In the United States, Goldman Sachs said that despite an expected dip in output in the second half of this year, production would increase by 205,000 bpd in 2016.

Yet most producers require higher prices. Deutsche Bank said that of major exporters only the United Arab Emirates, Qatar and Kuwait still have a balanced budget at current prices.

"With forward markets suggesting that the drop in prices is more permanent than temporary, a period of adjustment will therefore be necessary," it said.

Brent for delivery in May 2017 is only $4 per barrel costlier than spot prices, implying an expectation that prices will not rise sharply soon.

(Editing by Joseph Radford and Himani Sarkar)