Oil slips as ample supply outlook offsets Mideast turmoil

By Ron Bousso

LONDON (Reuters) - Brent crude oil prices declined on Monday after Goldman Sachs slashed its forecasts on a persistently high supply outlook, offsetting fears over deepening violence in the Middle East.

A major advance by Islamic State militants in Iraq and renewed air strikes by a Saudi-led coalition against Houthi militia in Yemen heightened concerns that turmoil could impact Middle East oil production.

Analysts nevertheless said oil markets remained oversupplied, and that the glut could worsen if U.S. production picked up and output by producer group OPEC stayed strong.

Front-month Brent futures were down 21 cents at $66.60 a barrel by 1315 GMT after climbing as high as $67.88 a barrel. U.S. crude rose 31 cents to $60 a barrel.

"The fact that Islamic State can still carry out major operations even after nearly a year of air strikes confirms that Iraq will remain unstable for a long period," said Richard Mallinson, geopolitical analyst at London-based Energy Aspects.

"However, in the short term, supply risks don't look higher than before. The market is still oversupplied and if prices go much higher in the U.S. we could start to see some drilling returning, which would slow down the rebalancing process."

Goldman Sachs lowered its Brent price assumption for 2016-2019 from $70 a barrel to $62-$65 and for 2020 from $70 a barrel to $55. However, the bank raised its 2015 price assumption from $52 a barrel to $58.

"We see global oil demand being met by U.S. shale, which is continuing to benefit from efficiency and productivity improvements, and OPEC," Goldman said in a report.

Signs that OPEC was unlikely to cut output at its key meeting next month put further strain on the supply outlook.

Kuwait's OPEC Governor Nawal al-Fuzaia said oversupply in the global oil market is due to slow demand and a rise in production from shale oil, but not from the Organization of the Petroleum Exporting Countries.

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

Speculators cut their bets on rising Brent crude prices for the first time in two months, data showed on Monday.

(Additional reporting by Henning Gloystein in Singapore; Editing by Dale Hudson and William Hardy)