Oil edges lower, set for big weekly decine

TOKYO (Reuters) - Oil prices edged lower on Friday and were set for a second weekly fall, as the market shrugged off a warning that spare capacity may be stretched as OPEC and Russia increase production.

Brent crude eased 20 cents, or 0.3 percent, to $74.25 by 0059 GMT. On Thursday it gained $1.05 a barrel, rebounding from a session low of $72.67. It is heading for a weekly fall of nearly 4 percent.

U.S. crude dipped 6 cents, or 0.1 percent, to $70.27, after a five cent decline in the previous session. It is heading for a weekly decline of nearly 5 percent.

It has been a wild week for oil prices with both the main benchmarks suffering heavy losses on Wednesday as traders focused on the return of Libyan oil to the market amid concerns about a China-U.S. trade war.

However, a warning on spare capacity by the International Energy Agency (IEA) pushed Brent higher on Thursday, helping it recoup some losses.

The IEA cautioned that the world's oil supply cushion "might be stretched to the limit" due to production losses in several different countries.

"Rising production from Middle East Gulf countries and Russia, welcome though it is, comes at the expense of the world's spare capacity cushion, which might be stretched to the limit," the Paris-based IEA said in its monthly report.

"This vulnerability currently underpins oil prices and seems likely to continue doing so," the agency said.

(Reporting by Aaron Sheldrick; editing by Richard Pullin)