November 13, 2017 / 7:49 AM / in a year

UPDATE 3-Oil markets cautious on Middle East tensions, increased US drilling

* Middle East tensions raise risk of supply disruptions

* But increase in US oil drilling caps prices

* Russia's Rosneft also ups output

* Technical indicators imply an overbought market (Adds Russia detail, updates prices)

By Henning Gloystein

SINGAPORE, Nov 13 (Reuters) - Oil trading was cautious on Monday amid ongoing tensions in the Middle East and after a rising rig count in the United States suggested producers there are preparing to increase output.

Brent crude futures were at $63.57 per barrel at 0744 GMT, up 5 cents from their last close. U.S. West Texas Intermediate (WTI) crude was at $56.78 per barrel, up 4 cents.

Traders said crude prices were generally well supported as ongoing output cuts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia have contributed to a significant reduction in excess supplies that have been dogging markets since 2014.

"The excess of OECD oil inventories over their five-year average levels has fallen by more than 50 percent in 2017, with inventories currently at around 160 million barrels. If current trends continue, inventories are likely to return to the five-year average at some stage in 2018," consultancy Timera Energy said on Monday, adding that strong demand had also helped reduce the glut.

On the supply side, tensions in the Middle East raised the prospects of disruptions, traders said, adding it was unclear whether a strong earthquake that hit Iran and Iraq on Sunday had impacted the region's oil production.

Bahrain said over the weekend that an explosion which caused a fire at its main oil pipeline on Friday was caused by sabotage, linking the attack to Iran, which denied any role in the incident.

Despite the Middle East tensions and OPEC-led supply cuts, traders were cautious in betting on further price rises, not least because of an increase in U.S. drilling for new production.

U.S. drillers added nine oil rigs in the week to Nov. 10, the biggest jump since June, bringing the total count up to 738, Baker Hughes energy services firm said on Friday.

The rig count RIG-OL-USA-BHI is also much higher than a year ago when only 452 rigs were active, indicating that the U.S. oil industry is comfortable operating at current prices.

U.S. oil producers have raised output C-OUT-T-EIA by more than 14 percent since mid-2016 to a record 9.62 million barrels per day. This led to a slide in crude futures prices late on Friday away from over two-year highs reached early last week.

Traders said that a rise in output from Russia's biggest oil producer, Rosneft, also weighed on crude. Rosneft said on Monday its hydrocarbon production in the third quarter had reached 70.5 million tonnes, up 0.7 percent from the previous quarter.

Crude futures may also receive downward pressure from technical indicators as Brent's relative strength index (RSI) has been above 70 points for much of November, implying an overbought market.

Reporting by Henning Gloystein; Editing by Joseph Radford and Kenneth Maxwell

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