* For the week, Brent set for 3.4-pct gain, US crude up 2.3 pct
* Iran oil exports expected to drop as U.S. sanctions implemented
* Other producers could increase output to meet shortfall
* U.S. drillers add rigs for sixth week - Baker Hughes (Updates prices, adds Baker Hughes rig count)
By Jessica Resnick-Ault
NEW YORK, May 11 (Reuters) - Global benchmark Brent crude stabilized near 3-1/2-year highs on Friday as the prospect of new U.S. sanctions on Iran tightened the outlook for Middle East supply at a time when global crude production is only just keeping pace with rising demand.
U.S. crude slipped slightly as domestic production continues to surge.
The United States plans to reintroduce sanctions against Iran, which pumps about 4 percent of the world’s oil, after abandoning a deal reached in late 2015 that limited Tehran’s nuclear ambitions in exchange for the removal of U.S. and European sanctions.
The global oil market is balanced, with top exporter Saudi Arabia and No.1 producer Russia having led efforts to curb oil supply to prop up prices.
“It’s the same witches brew of bullish stuff: Iran, Venezuela, the lack of alacrity by Saudi Arabia to bring more oil onto the market,” said John Kilduff, partner at Again Capital in New York.
Prices may strengthen later in the day as traders shore up their positions, he said. “It’s definitely not an environment to go home short over the weekend.”
Brent crude was flat at $77.47 a barrel by 1:33 p.m. EDT [1733 GMT], just below the $78-level it hit on Thursday, its highest since November 2014.
U.S. light crude was down 16 cents at $71.20, having touched a 3-1/2 year high of $71.89 on Thursday.
For the week, Brent was on track for a 3.5-percent gain and U.S. crude a 2.3-percent rise.
Many analysts expect oil prices to rise as Iran’s exports fall.
Rainer Seele, chief executive of Austrian oil and gas company OMV, told German daily Handelsblatt that he expects prices to rise as the United States moves to reimpose sanctions.
“It is not yet clear which concrete sanctions the U.S. will impose. But I expect the price of North Sea Brent to be closer to $80 than $70 a barrel,” Seele said in an interview.
U.S. investment bank Jefferies said in a note that it expects Iranian crude oil exports to start falling in the next few months.
“We expect that around October Iranian exports will be down by 500,000 barrels per day (bpd) and eventually fall by 1 million bpd,” the bank said.
There are signs, however, that other members of the Organization of the Petroleum Exporting Countries (OPEC) will raise output to counter the Iran disruption.
Jefferies said that OPEC has the capacity “to replace the Iranian losses” but added: “Even if physical supply is held constant ... the market will still be faced with a precariously low level of spare capacity.”
Outside OPEC, soaring U.S. crude oil production C-OUT-T-EIA could help to fill Iran’s supply gap. U.S. oil output reached another record high last week, hitting 10.7 million bpd.
That is up 27 percent since mid-2016 and means that U.S. output is creeping ever closer to that of top producer Russia, which pumps about 11 million bpd.
U.S. drillers added 10 oil rigs this week, the sixth consecutively weekly addition, bringing the total rig count to 844, the highest level since March 2015, General Electric Co’s Baker Hughes energy services firm said.
More than half the total oil rigs are in Permian basin in west Texas and eastern New Mexico, the nation’s biggest shale oil field. Active units there increased by five this week to 463, the most since January 2015.
Additional reporting by Henning Gloystein in Singapore Editing by Marguerita Choy and Jane Merriman