Oil prices flat as IEA warns of output capacity limits

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By Christopher Johnson

LONDON (Reuters) - Oil prices steadied on Thursday after sharp losses the previous session as the International Energy Agency (IEA) said the world's oil supply cushion "might be stretched to the limit" due to production losses.

Benchmark Brent crude oil rose $1.70, or more than 2.3 percent, to a high of $75.10 a barrel before losing almost all its gains to trade at $73.60, up 20 cents, by 1340 GMT. On Wednesday, Brent had slumped $5.46 or 6.9 percent.

U.S. light crude fell 30 cents to $70.08 a barrel, after losing 5 percent the previous session.

"Warnings from the IEA of a potential spare capacity crunch are helping the energy complex ... following yesterday's bloodbath," said Stephen Brennock, analyst at London brokerage PVM Oil Associates.

An announcement by Libya's National Oil Corp (NOC) that four oil export terminals were reopening, ending a standoff that had shut down most of Libya's oil output, was a key catalyst for a dramatic sell-off on Wednesday, analysts said.

The reopening will allow the return of up to 850,000 barrels per day of high-quality crude to international markets.

Two Libyan oilfields will reopen, NOC and industry sources said on Thursday, easing worries over supply from the key OPEC exporter that have helped prop up crude prices in recent weeks.

But supply concerns were highlighted again by the IEA, which reminded investors of the large number of output disruptions keeping pressure on global oil supply.

"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 agency said in its monthly report.

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

Prices also found support from a U.S. stocks report showing U.S. crude inventories fell by nearly 13 million barrels last week, the most in nearly two years, reducing overall crude stocks to their lowest since February 2015.

The decline in U.S. inventories was partially due to a fall in stocks at the Cushing, Oklahoma delivery hub for U.S. crude futures, which dropped 2.1 million barrels. [EIA/S]

"For WTI (U.S. light crude) there is tightness at Cushing, which will be supportive over July and August," said Virendra Chauhan, oil analyst at Energy Aspects in Singapore.

Supply to the U.S. market has also been squeezed by the loss of some Canadian oil production.

(Reporting by Aaron Sheldrick in Tokyo and Christopher Johnson in London; Editing by Edmund Blair and Dale Hudson)