UPDATE 5-Oil rises with Iran diplomacy in focus
* Obama pledges diplomacy with Iran; no Rouhani meeting
* Iraq boosts oil output, Libya ramps up exports
* EIA data shows a build of 2.6 mln barrels in crude stocks
NEW YORK, Sept 25 (Reuters) - Brent oil prices climbed for a second day on Wednesday as expectations faded that talks over Iran's nuclear program would bring a rapid thaw in relations with the United States and bring Iranian oil back to the market.
The West's standoff with Iran over its nuclear ambitions has helped support oil prices for nearly a decade. Years of sanctions have cut Iranian oil exports by more than 1 million barrels per day (bpd) and have about halved Tehran's oil sales since 2011.
U.S. crude traded higher most of the morning then took a tumble when data from the U.S. government's Energy Information Administration showed a build of 2.6 million barrels in crude oil stocks, losing around 70 cents within 10 minutes of its 10:30 a.m. EDT (1430 GMT) release. It then pared losses and turned positive within the hour.
Brent crude oil futures were up 78 cents at $109.42 a barrel at 11:43 a.m. EDT after gaining more than $1 to reach a session high of $110.09. U.S. crude was up 35 cents at $103.48 a barrel after four days of losses that drove it to seven-week lows in the previous session.
A rebound in supplies from Iraq and Libya and an assurance by Saudi Arabia's oil minister that the market has enough supply is likely to cap gains, investors said.
"Recently when we have reached the $109.50 mark the market has tended to run out of steam because there is more oil coming from Iraq and Libya and a high level of Saudi output," said Christopher Bellew, oil trader at Jefferies Bache.
"There is also a lot of speculative length in the market that has not been shaken out yet."
Iran has agreed to talks on its nuclear program with top diplomats from six world powers on Thursday, including U.S. Secretary of State John Kerry, strengthening expectations that Tehran's relations with the United States could thaw.
A failed effort to arrange a simple handshake between U.S. President Barack Obama and Iran's President Hassan Rouhani on the sidelines of the United Nations General Assembly highlighted entrenched distrust that will be hard to overcome.
"The United Nations talks didn't go as well as most people wanted, and it seems like the Iran situation is kind of moving the other way," said Joseph Posillico, senior vice president at Jefferies Bache in New York.
Rouhani told CNN he did not meet Obama at the U.N. General Assembly because the two sides "didn't have sufficient time to really coordinate the meeting".
Oil supply has improved as Iraq boosted output from its southern oilfields after repairing a leaking pipeline, although planned work continued to affect exports from OPEC's No. 2 producer.
Saudi Arabia Oil Minister Ali al-Naimi further allayed supply fears when he said the market had enough supply and prices were at a favourable level, affirming the willingness of the world's top crude exporter to meet shortages.
Libya also ramped up oil exports this week, with several tankers loading or fixed to load, after the country's western oil fields reopened following strikes by a combination of armed groups, oil workers, federalists and local activists.