* Middle East tensions raise risk of supply disruptions
* Increase in U.S. oil drilling caps prices (Updates prices)
LONDON, Nov 13 (Reuters) - The Brent oil price was steady at close to two-year highs on Monday, with support from Middle East tensions and record long bets by fund managers balanced by rising U.S. production.
Benchmark Brent crude futures were down a modest 5 cents at $63.47 a barrel by 1228 GMT but up 14 percent so far this month. U.S. West Texas Intermediate (WTI) crude futures rose 6 cents to $56.68.
Traders said crude prices were well supported as output cuts led by the Organization of the Petroleum Exporting Countries and Russia have contributed to a reduction in excess supply that had dogged markets since 2014.
The level of inventories held by industrialized above the five-year average "has fallen by more than 50 percent in 2017, with inventories currently at around 160 million barrels," consultancy Timera Energy said.
"If current trends continue, inventories are likely to return to the five-year average at some stage in 2018," it said, adding that strong demand had also helped reduce the glut.
OPEC has sought to push stocks to the five-year average.
Hedge funds increased holdings of Brent futures and options in the latest week, extending their bet on a rally to the highest on record. Managers now hold net long positions equivalent to nearly 544 million barrels of oil.
"Overall, there are a few reasons for confidence - compliance from OPEC - and it seems likely they'll extend the cut," said Jasper Lawler, a market strategist at London Capital Group, referring to the output deal due to expire in March.
On the supply side, tensions in the Middle East raised the prospect of disruptions, traders said. They said it was unclear whether a strong earthquake that hit Iran and Iraq on Sunday had affected the region's oil production.
Bahrain said at the weekend that an explosion that caused a fire at its main oil pipeline on Friday was caused by sabotage, linking the attack to Iran, which denied any role.
The rise in WTI futures towards $60 last week brought an increase in U.S. drilling. U.S. producers added nine oil rigs in the week to Nov. 10, the biggest jump since June, raising the count to 738, energy services firm Baker Hughes 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.
(Editing by Dale Hudson and Edmund Blair)