Oil Drifts but Set for Best Week in a Month Ahead of Producer Talks

Oil prices steadied on Friday as market participants awaited details on Saudi and Iranian positions ahead of a potential production freeze, capping a rally that has already given crude futures their best weekly gain in more than a month.

Saudi Arabia has offered to reduce oil production if rival Iran caps its own output this year, sources familiar with the discussions told Reuters as Riyadh seeks an OPEC deal to curtail supply and boost prices.

The offer, yet to be accepted or rejected by Tehran, was made this month, the sources told Reuters ahead of three-day talks in Algeria beginning Monday between the Organization of the Petroleum Exporting Countries and other major oil producers.

Traders and investors were also awaiting a U.S. oil rig count report to ascertain if more drillers were returning to the well pad in the world's largest oil consumer. The weekly report by oil services firm Baker Hughes, due at 1:00 p.m. EDT (1700 GMT) had shown rig additions in twelve out of the last 13 weeks.

Brent crude oil was up 5 cents at $47.70 a barrel by 11:10 a.m. EDT (1510), rallying to a near two-week high of $48.26 earlier on news of the Saudi-Iranian negotiations.

U.S. West Texas Intermediate (WTI) crude was down 12 cents at $46.20.

For the week, Brent was up 4 percent and WTI gained 7 percent for their biggest advance since the week ended Sept. 19.

The gains were powered by a surprise drop in crude stockpiles reported by the U.S. government on Wednesday for a third straight week.

Caution crept into Friday's session ahead of the Sept. 26-28 talks in Algiers. While talking of a potential production freeze, key OPEC members, including Saudi Arabia, Iran, Iraq, Libya and Nigeria have been pumping oil at optimum levels. Output has also hit record highs in non-OPEC member Russia, a key participants at the Algiers talks.

Scott Shelton, broker in energy futures at ICAP in Durham, North Carolina, said market skepticism about the Saudis and Iranians reaching a deal in Algeria was understandable.

"But should it be true, it underscores that Saudi Arabia does not want lower oil prices and that should be respected," he added.

(By Barani Krishnan; Additional reporting by Sabina Zawadzki and Libby George in LONDON and Henning Gloystein; in SINGAPORE; Editing by Marguerita Choy and Dale Hudson)