CORRECTED-UPDATE 8-Oil steady above $113 as Iraq fears offset warmer Iran-West links

Tue Jun 17, 2014 4:23pm EDT

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(Corrects paragraph 3 to show Iraq refineries process 3.3 million bpd of production, not 3.3 million bpd of exports)

* Iraqi oil exports unaffected as govt tightens security

* Iran, world powers to meet in Vienna for nuclear talks

* Britain to reopen Iran embassy in diplomatic breakthrough

* Iraq's main refinery shuts down

By Lorenzo Ligato

NEW YORK, June 17 (Reuters) - Brent oil held steady above $113 per barrel and U.S. crude weakened slightly on Tuesday as fears over oil supply disruptions from Iraq offset the possibility of increased supply due to a thawing of relations between Iran and the West.

Scores of Iraqis were killed on Tuesday during a battle for the provincial capital of Baquba as an uprising by Sunni insurgents continued to threaten the disintegration of Iraq. The fighting also shut the country's main oil refinery, starving parts of the country of fuel.

Islamic militants marching south towards Baghdad's Shi'ite-led government have seized towns in the north of the country in the past week. However, Iraq's oil refineries in the south, which process most of the country's 3.3 million barrels per day of oil production, have been unaffected so far.

Brent prices rose around 4 percent last week, the most since July last year, but the rally stalled after the Iraqi government tightened security around oil infrastructure.

"The market is going to be stable until there's more news about who is going to succeed," said Paul Smith, chief risk officer at Mobius Risk Group in Houston, Texas, referring to the conflict between Iraq's Shi'ite rulers and militants from the Islamic State of Iraq and the Levant.

Brent crude for August delivery gained 51 cents to settle at $113.45 per barrel.

U.S. July crude fell 54 cents to settle at $106.36 a barrel. The U.S. July contract expires on June 20.

The spread CL-LCO1=R between the two benchmarks closed at $7.58.

"Brent is obviously more at risk, while WTI is not as sensitive to [the situation in Iraq]. It just goes to show that this is America with oil independence," said Carl Larry, chief executive of consultancy Oil Outlooks in Houston. U.S. crude was pressured by a combination of high supply levels and lower refinery runs, Larry added.

Options expiration may also be putting pressure on the market with large open interest on the $105 strike price, said a futures broker in New York, who declined to be named.

Iraq's oil growth targets look increasingly at risk, the International Energy Agency said, highlighting the threat to supplies from political instability and violence.

The loss of one third of total Iraqi oil production, along with rising demand in the second half of 2014, could slash global spare capacity and generate a price increase of up to $40 per barrel, according to a report released by Securing America's Future Energy on Tuesday.

Underlining that threat, Iraq's largest oil refinery, a 170,000-bpd-processing facility in Baiji, has been shut down, refinery officials said on Tuesday.

Iraq will need to import about half its oil product needs, more than 300,000 barrels per day, said Adnan al-Janabi, a senior Iraqi oil official.

Meanwhile, Britain announced on Tuesday that it will soon re-open its embassy in Iran after a hiatus of 2-1/2 years, a diplomatic breakthrough that signals the West's desire to secure Tehran's help in Iraq.

Similarly, U.S. and Iranian diplomats discussed the Iraq crisis on Tuesday on the sidelines of a meeting in Vienna with five other world powers. The participants aimed to narrow differences and end a decade-old nuclear dispute.

A successful outcome could see additional Iranian crude exported to global markets if sanctions are eased, although no such move is expected imminently. (Additional reporting by Simon Falush in London and Jacob Gronholt-Pederson in Singapore; editing by Jason Neely and Keiron Henderson, Jessica Resnick-Ault, Peter Galloway and Andrew Hay)

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