LONDON, May 18 (Reuters) – Oil prices rose on Monday after Islamic State militants said they had seized control of the key city of Ramadi in western Iraq, raising fears of deeper turmoil in the oil-producing country.
Tensions in the Middle East were further heightened after a Saudi-led coalition resumed air strikes against Houthi militia in Aden, a port city on the shores of key Middle East oil routes.
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 up 37 cents at $67.18 a barrel by 0845 GMT. U.S. crude rose 48 cents to $60.17 a barrel.
"Ramadi is a strategic victory for the self-titled Islamic State. 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."
Oil services company Baker Hughes on Friday reported U.S. onshore rigs declined for a 23rd week in a row but the rate of that fall has slowed in recent weeks, suggesting the drilling collapse may be coming to an end as prices recover after dropping 60 percent from June to March.
"The decrease in drilling activity by more than half since the beginning of the year to its lowest level since August 2010 has not yet been reflected in the hard production data," Commerzbank said in a note.
"We see considerable correction potential for the oil price because it has been driven up by the expectation of falling U.S. supply."
Iranian comments that OPEC was unlikely to cut output cast further doubt on a drop in supplies.
Iran's Deputy Oil Minister Rokneddin Javadi told Reuters that OPEC was unlikely to cut output at its meeting 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.
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.
(Additional reporting by Henning Gloystein in Singapore; Editing by Dale Hudson)
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