UPDATE 3-Brent rises near to $110 a barrel on Ukraine fighting

* Brent, U.S. oil hold steady near two-week highs

* Libya's western El Feel oilfield resumes output-NOC

* Ukrainian soldiers killed, wounded in ambush in east

* U.S. oil inventories expected to drop as driving season nears

(Changes dateline to LONDON, updates prices, adds comment)

LONDON, May 14 (Reuters) - Brent futures rose above $109.50 a barrel on Wednesday, reaching a two-week high, on the deteriorating situation in the Ukraine and expectations of a fall in U.S. crude oil inventories.

Seven soldiers were killed and seven wounded in an ambush on Tuesday in the biggest single loss of life by the Ukrainian army since it was sent to east to oppose pro-Russian separatist groups.

Brent crude for June delivery was up 39 cents at $109.63 a barrel at 0953 GMT after closing up 83 cents. The June contract expires on Thursday.

U.S. oil was up 37 cents at $102.07 a barrel after finishing $1.11 higher in the previous session at its highest settlement since April 24.

U.S. crude also rose to a two-week high on Wednesday, continuing the momentum of the oil stocks draw in the United States and expectations that crude inventories fell further last week as the summer driving season nears.

The U.S. Energy Information Administration will release its oil data later on Wednesday.

Stocks of U.S. crude oil at Cushing, Oklahoma, already dropped to their lowest levels since 2008 in the week to May 2.

Global supplies could be set to increase with the resumption of a major Libyan oilfield.

"The return of some Libyan output is relatively important but people are more concerned with the Ukraine," Eugen Weinberg, analyst at Commerzbank in Frankfurt said.

The El Feel oilfield, also known as Elephant, has resumed production, Libya's state oil company said on Wednesday, after protesters agreed to end their blockade of the pipelines connecting western oilfields to the export terminals.


A U.S. official said on Tuesday that a deal between Iran and the six world powers over Tehran's controversial nuclear program is possible by the self-imposed July 20 deadline even though "there are some very significant gaps".

A deal could potentially bring about a further easing of sanctions on Iran and the return of more of its oil to global markets.

Also acting as a dampener for demand, a slew of data from China on Tuesday, including industrial output, retail sales and fixed asset investment, showed slower growth for April in the world's second largest economy.

China consumed roughly 9.71 million barrels per day (bpd) of oil last month, according to Reuters calculations based on preliminary government data, the lowest level in seven months and down from 9.79 million bpd in March. Growth in China's oil demand has been slowing since mid-2013, the International Energy Agency said in an April report.

(Additional reporting by Keith Wallis, editing by William Hardy)