* Brent, U.S. oil hold steady near two-week highs
* U.S. oil inventories expected to drop as driving season nears
* Libyan oil output still uncertain after protest ended
By Keith Wallis
SINGAPORE, May 14 (Reuters) - Brent futures held above $109 a barrel on Wednesday near a two-week high, boosted by expectations of a fall in U.S. oil inventories, and supported by the deteriorating situation in Ukraine and the potential for other supply disruptions.
Both the European and U.S. benchmarks rose to two-week peaks on Tuesday as analysts said they expect supplies were drawn down further in the United States last week as the country nears the start of its summer driving season.
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 eastern Ukraine to smash pro-Russian separatist groups.
Brent crude for June delivery rose 21 cents to $109.45 a barrel at 0457 GMT after closing up 83 cents. It earlier hit $109.49 on Wednesday, the highest since April 28. The June contract expires on Thursday.
U.S. oil was up 36 cents to $102.06 a barrel after finishing $1.11 higher in the previous session at its highest settlement since April 24.
"People are watching Brent for supply risks from Russia, Ukraine and Libya," said Tetsu Emori, a commodity fund manager at Astmax.
But investors were more focused on the United States, which is heading into the summer driving season when oil demand is expected to increase and pull down stocks, he added.
Stocks of U.S. crude oil at Cushing, Oklahoma, dropped to their lowest levels since 2008 in the week to May 2, and analysts surveyed by Reuters expect supplies were drawn down again last week.
According to industry group the American Petroleum Institute stocks at Cushing fell 590,000 barrels last week, while nationwide commercial crude stocks rose 912,000 barrels.
The U.S. Energy Information Administration will release its more closely watched official oil data later on Wednesday.
Brent could climb to $110 a barrel and U.S. crude could hit $103 a barrel in the short-term if there were further draws in U.S crude stocks, Emori said.
"From the last week of this month normally oil prices increase until the end of the summer. I'm quite bullish on the oil market," Emori said.
New European Union sanctions targeting 13 people and two Crimean companies will hinder efforts to defuse the Ukraine crisis, Russia has said, with Moscow also urging the West to persuade Kiev to hold discussions on the country's future before a May 25 presidential election.
Meanwhile, with Libya's oil output at just 235,000 barrels per day (bpd), details about the output from the nation's 340,000 bpd oilfield remain uncertain after protesters ended a shutdown, the National Oil Corporation said on Tuesday.
"Libya's oil minister said the oil fields would be running in a few days, but we don't have any information. We are carefully watching that," Emori said.
One bright note on global supply came when a U.S. official said on Tuesday that a deal between Iran and the six world powers over Tehran's controversial nuclear programme is possible by the self-imposed July 20 deadline even though "there are some very significant gaps". (Reporting By Keith Wallis; Editing by Tom Hogue)