UPDATE 4-Oil extends gains, on track for biggest weekly rise this year

* Brent, WTI futures at 8-week highs

* Brent front curve flips into backwardation

* U.S. rig count data expected later on Friday (Adds milestones, updates prices)

LONDON, July 28 (Reuters) - Oil prices edged higher on Friday, reaching new two-month highs and on track to post the strongest weekly percentage gains this year as investors digested signs of an easing oversupply.

U.S. crude and gasoline inventories fell much more steeply than expected this week and the world's biggest oil exporter Saudi Arabia said it would further reduce oil output in August.

Brent crude futures were up 44 cents at $51.93 a barrel at 1334 GMT after reaching a new two-month high of $52.02 a barrel. The front of the crude oil curve jumped into backwardation, with the month-ahead trading above the subsequent month, showing investors are not expecting recent gains to last.

U.S. West Texas Intermediate (WTI) crude futures were up 30 cents at $49.34 a barrel, after also touching a fresh two-month peak of $49.38 a barrel.

Both contracts are set to post their biggest percentage gains this year with a rise of around 8 percent.

"Positive signs came from the draw in gasoline stocks this week, as the U.S. moves into the peak driving season," said Ashley Kelty, oil analyst at Cenkos Securities.

U.S. crude stocks fell sharply by 7.2 million barrels in the week to July 21 due to strong refining activity and an increase in exports, according to data from the Energy Information Administration (EIA).

Brimming U.S. crude supplies have been a challenge to production cuts to prop up prices led by the Organization of the Petroleum Exporting Countries, meaning weekly U.S. inventory data is closely watched.

Despite these signs, analysts' assessments of the oil market remained bearish.

"We believe the latest price rise is on a fragile footing," analysts at Commerzbank said, adding OPEC production was likely to rise in the coming months as the group has not officially capped output from members Libya and Nigeria.

Investors were eyeing an update on the U.S. rig count expected later on Friday to assess any signs of a slowing down in drilling activity.

(Additional reporting by Jane Chung in Seoul; Editing by Adrian Croft)