* Brent bounces off 2-month low, recovers to near $106
* Shell issues profit warning, blames lower prices
* U.S. crude on track for first weekly gain in three weeks
* Iran expects OPEC members to cut oil output
LONDON, Jan 17 (Reuters) - Brent crude oil reversed early losses on Friday after touching a two-month low near $105 a barrel, but remained on course to finish down for the week as traders assessed the likelihood of a sustained recovery in supply from Libya.
Brent's premium over U.S. crude also fell to its lowest in almost a month, as the start-up of a major pipeline next week is expected to help ease a bottleneck in the Midwest and let more fast-rising shale production flow to Gulf Coast refineries.
Brent crude for March delivery, which became the front-month contract following the expiry of the February contract on Thursday, rose 34 cents to $106.09 a barrel by 0904 GMT, bouncing off a two-month low of $105.44. Front-month Brent is on course for a weekly decline of around 1 percent.
U.S. crude rose 44 cents to $94.40 a barrel and was set to post its first weekly gain in three weeks.
Libya's crude production has partially recovered after it restarted output at the El Sharara field, while progress in nuclear talks between the major powers and Iran could ease sanctions that have curbed exports from the OPEC producer.
But losses have been limited as domestic tensions continue to threaten the oil sector in Libya, where authorities held talks this week with protesters who threatened to restart a blockade of the El Sharara field.
"There is still a strong belief in the market that supplies from Libya and Iran will recover this year," Carsten Fritsch, senior oil and commodities analyst at Commerzbank in Frankfurt, said.
"But this view is perhaps a little optimistic, and there's likely to be some disappointment along the way that should add support to Brent prices."
Sanctions have cut Iran's oil exports by more than half over the past 18 months to about 1 million barrels per day (bpd). But Iran may be able to release more into world markets if a dispute over its nuclear work can be resolved.
A preliminary accord between Iran and the P5+1 group of world powers will start on Jan. 20 while talks on a final settlement will start in February.
Iran expects fellow OPEC members to cut back output and make room for rising oil supplies from Tehran when Western sanctions are lifted, Foreign Minister Mohammad Javad Zarif said.
SHELL WARNS ON PROFITS
Royal Dutch Shell warned on Friday that its fourth-quarter results are expected to be significantly lower than recent levels of profitability because of lower oil and gas prices and problems with its refining business.
Brent prices have fallen almost 10 percent since topping $117 in August on expectations supplies will be stronger in 2014.
The restart of Libya's El Sharara two weeks ago and a jump in exports from Iraq's southern terminals in the first two weeks of 2014 also weighed on crude prices.
But Iraq's supply could be cut in February on loading delays caused partly by bad weather.
Outages in Libya, Iraq and elsewhere are taking a toll on output from OPEC, which is pumping less than this year's global need for its crude, the exporter group said on Thursday.
In the United States, the start-up of TransCanada's Gulf Coast pipeline project is due to commence next week, diverting excess oil away from the U.S. crude oil contract's delivery point in Cushing, Oklahoma, narrowing its price discount to Brent.
The spread has shed more than $4 this week and on Friday touched a four-week low of $11.23 a barrel.