* U.S. aircraft hit Islamic State artillery in Iraq
* Kurds say northern pipeline operating normally
* Brent hits $106.85 a barrel before dropping back (Updates prices to settlement, adds Brent-WTI spread)
By Lorenzo Ligato
NEW YORK, Aug 8 (Reuters) - Brent crude oil fell toward $105 a barrel on Friday, following U.S. air strikes in Iraq that analysts said might lower the risk of oil supply disruptions from OPEC's second-largest producer, while U.S. crude found support from a rebounding stock market.
Brent oil prices rose on Thursday on reports that the United States was considering air strikes on the Islamic State fighters who have advanced across Iraq's semi-autonomous Kurdish region. But traders took profits on Friday after the Pentagon confirmed the military intervention in the north of the country.
"In essence we find U.S. air strikes more bearish than bullish for oil as the act finally draws a line not to cross for IS and re-enforces both the stability in south Iraq and in Kurdistan," said Oliver Jakob, an analyst at Switzerland-based Petromatrix, in a note to traders.
Brent hit a weekly high of $106.85 earlier in the session, but soon entered negative territory and settled 42 cents lower at $105.02 a barrel.
U.S. crude rose 31 cents to settle at $97.65 a barrel, off an intraday high of $98.45. U.S. prices were supported by a sudden rebound in the stock market prompted by news that Russia was ending military drills near the Ukrainian border.
The spread CL-LCO1=R between the two benchmarks closed at $7.37.
Both Brent and U.S. crude inverted their upward trajectory in mid-morning trading, as initial alarm about escalating violence in Iraq gave way to the recognition that the U.S. air strike intervention could in the long-run secure oilfields not just in the north, but also in the more prolific oil-producing regions further south.
Brent spiked above $115 in mid-June on fears that violence in Iraq would disrupt oil supplies. But prices have fallen back more than $10 over the past six weeks, as it became clear that Iraqi oil continued to flow steadily from southern fields, over 500 miles (900 km) from the escalating violence in the north.
The Kurdistan Regional Government on Friday said its oil export pipeline to Turkey was operating normally at a rate of 120,000 barrels per day (bpd).
In Kurdistan, producer Afren suspended output at its small Barda Rash oilfield, but Genel Energy said its Taq Taq and Tawke oilfields continued producing and averaged 230,000 bpd this week.
PVM Oil Associates Managing Director David Hufton said a loss of oil production from the Kurdish region would not affect the market.
Putting further pressure on prices, OPEC's monthly report showed a modest 167,000 bpd increase in production for July and a slight downward revision to 2014 demand, pointing to more comfortable global supplies. (Additional reporting by Jack Stubbs and Jacob Gronholt-Pedersen; Editing by Dale Hudson and Chris Reese)