It has previously been shown that in situ upgrading of heavy oil by toe-to-heel air injection (THAI) can be augmented by surrounding the horizontal production well with an annulus of pelleted catalyst. Despite the further upgrading achieved with this configuration, the accumulation of coke and metals deposits on the catalyst and pore sites, resulting from cracking of the heavy oil, have a detrimental effect on the catalyst activity, life span, and process. An alternative contacting pattern between the oil and nanoparticulate catalysts was investigated in this study, to mitigate the above-mentioned challenges. The Taguchi method was applied to optimize the effect of reaction factors and select the optimum values that maximize level of heavy oil upgrading while suppressing coke yield. The reaction factors evaluated were reaction temperature, H2 initial pressure, reaction time, iron metal loading and speed of mixing. An orthogonal array, analysis of mean of response, analysis of mean signal-to-noise ratio (S/N) and analysis of variance (ANOVA) were employed to analyze the effect of these reaction factors. Detailed optimization of the reaction conditions with iron oxide dispersed nanoparticles (≤50 nm) for in situ catalytic upgrading of heavy oil was carried out at the following ranges; temperature 355-425°C, reaction time 20-80 min, agitation 200-900 rpm, initial hydrogen pressure 10-50 bar, and iron metal loading 0.03-0.4 wt %. It was found that the optimum combinations of reaction factors are temperature 425°C, initial hydrogen pressure 50 bar, reaction time 60 min, agitation 400 rpm and iron-metal loading 0.1 wt %. The properties of upgraded oil at the optimum condition are API gravity 21.1°, viscosity 105.75 cP, sulfur reduced by 37.54%, metals (Ni+V) reduced by 68.9%, and naphtha plus middle distillate fractions (IBP: 343°C) increased to 68 wt % relative to the feed oil (12.8°API, 1482 cP, sulfur content 3.09 wt %, metals (Ni+V) content 0.0132 wt %, and naphtha plus middle distillate fractions 28.86 wt %).