UPDATE 5-Oil falls below $111 as supply outlook looks up
* IEA points to healthy supply picture in 2014
* Signs U.S. budget deadlock may be broken limit losses
* No CFTC data on Friday due to U.S. govt shutdown
(Updates prices, recasts lead, adds quotes)
LONDON, Oct 11 (Reuters) - Brent crude oil fell below $111 on Friday, pressured by an improved supply picture, which offset optimism for an end to the U.S. government shutdown.
The supply outlook improved as the International Energy Agency said non-OPEC supply would rise by an average of 1.7 million barrels per day (bpd) in 2014, the highest annual growth since the 1970s.
The IEA, the West's energy watchdog, said in its monthly report that the United States would become the world's largest oil producer next year, compensating for anticipated disruption in OPEC production.
Brent oil was 77 cents lower at $111.03 per barrel at 1415 GMT. The benchmark was still up roughly 2 percent for the week and set for its biggest weekly gain in six weeks.
U.S. crude was down $1.75 at $101.26 per barrel, on track for its fourth weekly decline in five weeks.
Brent oil jumped almost $3 on Thursday on concerns about supply disruptions in the Middle East and North Africa and on optimism that a deal to extend funding of the U.S. government could be struck.
"The IEA data is bearish for prices, since investors face less risk from supply disruptions in North Africa and the Middle East," said Simon Wardell, analyst at IHS Global Insight.
Prices retreated sharply after U.S. markets opened, but traders gave varying reasons for the sudden move. Gold prices also fell by some $20 per ounce several minutes prior to the move in oil.
The spread between U.S. crude and North Sea Brent <CL-LCO1=R> stood at $9.83 per barrel and was on course for its widest settlement since early June.
"It looks like investors have been caught on the wrong foot and are having to scale back their positions, pushing the WTI-Brent spread wider," said Carsten Fritsch, analyst at Commerzbank in Frankfurt.
Signs that U.S. President Barack Obama and Republican leaders were ready to break their deadlock over government funding stemmed further losses.
Republican leaders offered a plan on Thursday to temporarily extend the U.S. government's borrowing authority, raising hopes of an end to the budget impasse that has clouded the demand outlook in the world's biggest oil consumer.
Although questions remained over whether a deal could be struck, the news propelled Brent to four-week high of $112 a barrel on Thursday.
"Going forward, it's going to be a demand issue. The longer the U.S. government shutdown continues, the greater the drag on oil prices," said Michael Hewson, senior analyst at CMC markets.
Oil also found support on lingering instability in OPEC member Libya, where former militiamen briefly captured Prime Minister Ali Zeidan on Thursday.
Output in Libya only recently recovered to 700,000 barrels per day, down from a pre-war output of around 1.6 million bpd, after armed groups shut down pipelines and oil ports.
In Nigeria, Royal Dutch Shell on Friday declared a force majeure on Bonny Light crude oil <BFO-BON>, just a week after it was lifted.
The U.S. Commodity Futures Trading Commission will not publish its weekly Commitment of Traders report, which was due on Friday and gives an indication of investors' positions, because of the government shutdown.
(Additional reporting By Jacob Gronholt-Pedersen in Singapore; editing by Keiron Henderson and James Jukwey)