Oil pulls back below $107

By Felicia Loo

SINGAPORE (Reuters) - Oil fell towards $106 a barrel on Friday as traders wary over the U.S. economic outlook took profits from a three-day rally and were cheered by news that Iraq's oil pipeline system was back at near normal levels.

U.S. crude dropped 67 cents or 0.6 percent to $106.91 a barrel by 0616 GMT, after earlier falling as low as $106.29 a barrel.

On Thursday, saboteurs blew up a pipeline in southern Iraq, cutting exports by 300,000 barrels per day (bpd), helping lift crude to a $$1.68 gain in New York.

But on Friday, a senior Iraqi oil official said Iraq's southern oil pipeline system was back at near normal levels to its Basra export terminal after the two main pipelines were left undamaged during Thursday's attack.

Despite Friday's declines, prices are still up 5 percent on the week, near their mid-March record high of $111.80, amid a broad fund-led rally in commodities markets aided by a weak U.S. dollar and news of an unexpectedly deep decline in weekly U.S. fuel stocks.

"People are taking a wait-and-see approach on Iraq and have moved into profit taking as demand is at its lowest during the second quarter. There are concerns over the U.S. economy," said Robert Nunan of Mitsubishi Corp in Tokyo.

A shipping source at Iraq's Basra export terminal said the pipeline attack cut flows on the line to around 1.2 million barrels per day, down 300,000 bpd from average levels.

Analysts said the attack -- the first disruption to shipments from Iraq's south since 2004 -- could prompt traders to attach a bigger "fear premium" to prices, as it raised the risk to previously stable supplies.