Oil sticks at $70 as supply concerns hard to shake

SINGAPORE, June 9 (Reuters) Oil prices consolidated above on Friday as traders remained cautious on the potential for improved supplies from Iraq and reduced tension over Iran's nuclear programme.

U.S. crude oil had risen 5 cents to .40 a barrel by 0300 GMT, after falling 47 cents on Thursday. London Brent crude rose 14 cents to .19 a barrel.

Prices dipped below on Thursday after U.S. aircraft killed al Qaeda's leader in Iraq, Abu Musab al-Zarqawi, raising some hope for an improvement in security that could help Iraq's wrecked oil industry recover.

But analysts warned against reading too much into the killing of Zarqawi, who masterminded the deaths of hundreds in bombings, saying it would not end threats to an oil sector curtailed by decades of war and sanctions.

''We suspect that the death of Zarqawi will not bring more security to the Iraqi oil sector, where political instability and violence will continue to hamper exports and investment,'' said David Thurtell of the Commomwealth Bank of Australia.

Iraq is struggling to pump 2 million barrels per day, down from about 2.5 million bpd before the U.S.-led invasion in 2003. A quarter of Nigeria's output has also been cut by militant attacks while concern remains over Iran's supplies.

Iran launched a fresh round of uranium enrichment this week just as world powers offered it incentives to halt nuclear fuel work with the potential to produce atomic bombs, a U.N.

watchdog said on Thursday.

Iranian President Mahmoud Ahmadinejad said on Thursday the Islamic state would ''talk about mutual concerns and solving misunderstandings in the international arena.'' But the president's remarks came a day after Oil Minister Kazem Vaziri-Hamaneh said Iran could still use its oil exports for leverage in the dispute over its nuclear program.

RISING U.S. SUPPLIES Traders also remain on edge over supply disruptions in Nigeria, the world's eight-largest exporter, where militants released five kidnapped South Korean contractors on Thursday, after attacking a Shell-operated facility in the Niger Delta.

The bullish impact of supply disruptions and geopolitical tension is being moderated by worries that high prices are feeding inflation and slower growth in key consumers such as the United States, helping push oil down from April's record .35.

A draft Group of 8 communique, seen by Reuters on Thursday, said high oil prices may damage the world economy more in the future than they have done so far.

A signal on supply and demand came from U.S. government data this week that showed a further rise in gasoline and distillate fuel stocks, providing a more comfortable supply cushion for the northern summer when drivers take to the roads.

U.S. crude supplies also increased unexpectedly last week on lower refinery output, taking stocks 4.2 percent above this time last year.

OPEC crude producers have been pumping at near full rates in a bid to ease prices and agreed last week to keep output levels unchanged. The cartel will raise oil shipments by 210,000 bpd in the four weeks to June 24, with extra barrels heading to Asian consumers, an oil shipping analyst said on Thursday.

And production from non-OPEC Norway, the third-biggest exporter after Saudi Arabia and Russia, rose to a preliminary 2.38 million bpd on average in May from 2.22 million in April, government figures showed on Thursday.

REUTERS CS HS1114