NEW YORK (Reuters) - Oil prices fell on Friday, dropping from highs last seen in 2015, as soaring U.S. production undermined a 10 percent rally from December lows that was driven by tightening supply and political tensions in OPEC member Iran.

A pump jack is seen at sunrise near Bakersfield, California October 14, 2014. REUTERS/Lucy Nicholson/File Photo

Rising U.S. output and weaker refined products demand weighed on the market, traders said.

“The holiday demand surge that we get is in the rearview mirror,” said John Kilduff at Again Capital. “That, coupled with the rebound in U.S. production, is helping to undercut some of the recent price strength.” While product demand is up from a year earlier, robust stockpiles and a cold snap in the U.S. could put a damper on demand for transportation fuels.

Traders said political tensions in Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), had pushed prices higher.

“The protests in Iran add more fuel to the already bullish oil market mood,” said Norbert Ruecker, head of commodity research at Swiss bank Julius Baer. On Friday there was no new major outbreak of violence in the country, relieving some of the tension from the market.

West Texas Intermediate crude CLc1 futures fell 57 cents to settle at $61.44 a barrel. WTI hit $62.21 the previous day, which was its strongest price since May 2015.

Brent crude LCOc1 futures for March delivery fell 45 cents, or 0.7 percent, to $67.62 a barrel. The previous day it touched $68.27, also the highest price since May 2015.

“Crude oil traders are probably getting some demand concerns at the $60 threshold for WTI and especially the risk that Brent – the biggie globally – could hang out above $65 for too long,” said Richard Hastings, macro strategist at Seaport Global Securities.

“The U.S. winter could disrupt some gasoline consumption, and this would contribute to a slight weakness in various gasoline signals – and the oil markets never like that. All of this is the typical sentiment of being overextended,” Hastings said.

Oil prices have received general support from production cuts led by OPEC and Russia, which started in January last year and are set to last through 2018, as well as from strong economic growth and financial markets. [MKTS/GLOB]

That has helped to tighten markets. U.S. commercial crude inventories C-STK-T-EIA fell by 7.4 million barrels in the week to Dec. 29, to 424.5 million barrels, according to data from the Energy Information Administration.

That is down 20 percent from peaks last March and close to the five-year average of 420 million barrels.

Yet, surging U.S. production could offset some of the cuts from OPEC producers, as it rose to 9.78 million barrels per day (bpd) in the latest week, according to Wednesday’s report.

U.S. drillers cut five oil rigs in the week to Jan. 5, bringing the total count down to 742, General Electric Co's GE.N Baker Hughes energy services firm said in its closely followed report on Friday. RIG-OL-USA-BHI

The rig count, an early indicator of future output, is much higher than a year ago when only 529 rigs were active.

CAN THE BULL RUN LAST?

With Iranian production unaffected by unrest and U.S. output C-OUT-T-EIA likely to pass 10 million bpd, a level reached only by Saudi Arabia and Russia, doubts are emerging whether the bull run can last.

Bank Jefferies said the oil price “upside from here is not obvious to us,” but added it expected the oil market to remain undersupplied through 2018.

Julius Baer’s Ruecker said crude prices above $60 project an “overly rosy picture.”

“Oil production disruptions (in Iran) remain a very distant threat ... disruptions in the North Sea have been removed ... (and) U.S. oil production surpassed the 2015 highs in October and is set to climb to historic highs this year,” he said.

Lukman Otunuga, an analyst at futures brokerage FXTM, struck a similarly cautious tone, saying, “While the current momentum suggests that further upside is on the cards, it must be kept in mind that U.S. shale remains a threat to higher oil prices.”