* U.S. crude oil stocks rise -EIA
* Risk of Iraq supply disruptions recedes
* U.S. permits exports of lightly refined oil (Updates prices at settlement)
By Lorenzo Ligato
NEW YORK, June 25 U.S. crude oil inched higher on Wednesday after news of a U.S. government decision to permit exports of lightly refined oil, while Brent oil fell as fears of supply cuts from Iraq receded.
U.S. crude reversed a two-day downward trend, after U.S. federal officials approved exports of condensate, an ultra-light oil, in a marginal relaxation of a 40-year ban on U.S. oil exports.
The rally lost some momentum after weaker-than-expected data from the U.S. Energy Information Administration (EIA) pointed to a potential dip in demand growth from the world's largest oil consumer and as traders awaited some clarification of what the condensate ruling would mean for the market.
"There are still a lot of questions about how aggressive the U.S. will be in exporting condensate," said Phil Flynn, an analyst at Price Futures Group in Chicago.
Brent lost 46 cents to settle at $114.00 a barrel, as worries about sectarian violence reducing Iraqi exports seemed to fade. Brent hit a nine-month high of $115.71 last week on the fighting in Iraq.
U.S. crude gained 47 cents to settle at $106.50 a barrel. It had hit $107.50 in early trade as the market reacted to the news on U.S. condensate exports.
The spread CL-LCO1=R between the two benchmarks narrowed to close at $7.50, after it had widened to $9.01 last week.
U.S. officials have told energy companies they can export a variety of condensate if it has been minimally refined, a U.S. Commerce Department spokesman confirmed to Reuters, although he said there had been "no change in policy" towards crude exports.
Analysts say allowing more U.S. oil to be exported could help tighten the domestic market, pushing up prices.
However, U.S. oil pared some gains after a weekly EIA report showed that crude inventories rose by 1.74 million barrels to 388 million barrels, against a forecast for a 1.6 million barrel draw on stocks.
"The rise in all categories is somewhat bearish, but refinery activity picked up, so that will generate some renewed crude oil demand, which is supportive," said John Kilduff, a partner at Again Capital LLC in New York.
Brent had made sharp gains in the past two weeks on concerns over fighting in Iraq, OPEC's second-largest producer and exporter. But with exports from Iraq's southern terminals running near record levels and most of the country's oilfields in the peaceful south, far away from the Sunni insurgency, worries about supply have been easing.
"The risk of losing some Iraqi oil production is not zero, but it is very low, 5-10 percent, I think," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt. "But the tail risk will keep oil prices elevated for now. Hence, I expect Brent to stay above $110 for the time being." (Additional reporting by Simon Falush and Christopher Johnson in London; Editing by Jason Neely, Keiron Henderson, Peter Galloway and Eric Walsh)