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UPDATE 1-Brent rises above $109; set for biggest weekly gain in 2 months

Friday, 1 Nov 2013 | 2:36 AM ET

* China's Oct official manufacturing PMI beats forecasts

Global surplus oil capacity inches up in September, October -US

* Libyan oil exports restricted, efforts to end crisis falter

* Brent oil targets $107.62 - technicals

(Adds latest on Libyan talks, comments, updates prices)

By Manash Goswami

SINGAPORE, Nov 1 (Reuters) - Brent futures rose above $109 a barrel on Friday on expectations of growth in demand after an official survey showed manufacturing in China, the world's second-biggest oil consumer, expanded in October at its fastest pace in 18 months.

The European benchmark had come under pressure overnight as investors sold the spread between the contract and the U.S. crude benchmark after the price difference between the two hit its widest level in six months.

Yet Brent is set to post its biggest weekly gain in about two months because of concerns about supply as Libya struggles to ramp up exports and unrest in Iraq worsens.

Brent crude gained 41 cents to $109.25 a barrel by 0607 GMT, after settling down $1.02.

U.S. oil rose 22 cents to $96.60, but the contract is poised to fall for the fourth straight week, its longest losing streak since June 2012.

"The latest data shows that China will take measures to ensure growth will stick to the government-set target of 7.5 percent," said Victor Shum, vice-president of energy consultancy IHS Energy Insight.

"Supply concerns over Libya and Iraq will also keep oil supported."

In the first nine months of the year, China's economy grew 7.7 percent from a year earlier, putting it on track to achieve Beijing's 2013 target of 7.5 percent, although that would still be the worst performance in 23 years.

Economists in a recent Reuters poll saw the economy growing an annual 7.5 percent in the fourth quarter after 7.8 percent in the third.

Shum expects Brent to hold around the $108 a barrel mark in the short term because of supply concerns amid steady demand, while U.S. crude may trade between $95 and $100, rising towards $100 as refiners in the world's top oil consumer return from maintenance to soak up bulging inventories.

The improvement in the U.S. contract will help narrow the price gap between the two contracts, Shum said. Brent's premium over WTI <CL-LCO1=R> had risen by nearly $5 over the past five sessions and expanded to as much as $13.60 a barrel overnight.

"The spread between the two has gone too wide, but I do understand the reasons for it," said Shum. "Brent is being supported by production issues, while WTI is being weighed down by the rather big build in U.S. crude stocks."

SURPLUS CAPACITY

The outages in Libya are putting a strain on global spare capacity, a key factor influencing crude prices.

While the U.S. Energy Information Administration (EIA) said global spare capacity for crude oil production rose slightly in September and October, a prolonged disruption in Libyan supplies and concern about growing unrest in Iraq mean the oil industry will have to rely solely on top exporter Saudi Arabia to fill any gap in output.

The spare capacity, which is the amount of oil that global producers can quickly bring on line without major investment, a key factor in global crude prices, averaged 1.8 million barrels a day in September and October, or 200,000 bpd higher than in the previous two months.

Libyan crude exports showed little improvement after falling to a trickle this week, except for one tanker that was expected to load condensate from the small western port of Mellitah, trading sources said.

Exports from the OPEC producer have fallen to around 90,000 barrels per day (bpd) from the two offshore oil platforms, Al Jurf and Bouri, or less than 10 percent of its 1.25 million bpd capacity.

"In Libya, uncertainty remained as efforts to appease the workers and reopen the Hariga terminal did not seem to be successful," analysts at Phillip Futures said in a note.

(Reporting by Manash Goswami; Editing by Clarence Fernandez and Alan Raybould)