* Wildfire has potential to destroy much of Canadian oil town
* Some pipelines in affected Canadian region shut as precaution
* Fighting in Libya escalates, disrupting supplies
* Brent premium over WTI shrinks; WTI front-month contango narrows (New throughout, updating market activity and comments to U.S. session; changes byline and dateline, previous LONDON)
By Barani Krishnan
NEW YORK, May 5 (Reuters) - Oil prices jumped 3 percent on Thursday, resuming their rally from last week, as a raging wildfire near Canada's oil sands region and escalating Libyan violence raised more worries about immediate oil supplies than a longer-term glut.
The wildfire near Fort McMurray in Alberta, Canada, has grown five times its initial size and spread south on Thursday, forcing more evacuations after 88,000 people fled the city in the nation's energy heartland since Tuesday. Some pipelines in the region have been shut as precaution and output at several facilities were disrupted, though affected volumes were unclear. Libya, the state's already crippled oil production was at further risk from a stand-off between eastern and western political factions that prevented a Glencore (LON:GLEN) cargo from loading. futures LCOc1 were up $1, or 2.2 percent, at $45.62 a barrel by 10:51 a.m. EDT (1451 GMT), after soaring more than $2 earlier to $46.77.
U.S. crude's West Texas Intermediate (WTI) futures CLc1 gained $1.25, or 2.9 percent, to $45.03, rallying to $46.07 earlier.
Brent's premium over WTI CL-LCO1=R briefly vanished when the U.S. market traded at a premium before returning to its narrowest discount, or "contango", in six weeks against the European benchmark.
On the WTI complex itself, the discount for front-month June over second month July CLc1-CLc2 fell to its smallest in seven months, driven by the potential for reduced shipments of Canadian crude to U.S. refiners.
"The $2 move in WTI is large relative to the size of the outage," said Jackie Forrest, vice president in energy research at ARC Financial Corp in Calgary.
Just earlier this week, crude prices were losing steam after rallying more than 20 percent in April, giving Brent its best month in 7 years.
Over Monday and Tuesday, both benchmarks lost about 6 percent each as frenzied pumping by producers such as Iran, Iraq, Saudi Arabia and Russia renewed glut worries that forced prices below $30 a barrel from mid-2014 highs above $100.
"The market was again rescued by a larger than expected pace of U.S. production decline and overnight headlines regarding disrupted supply out of Canada and Libya," said Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates.
Investment firm ETF Securities said unplanned outages within the Organization of the Petroleum Exporting Countries, including Libya, stood above 2 million barrels per day, the highest in at least five years.
"We are likely to be in a global oil supply deficit by Q3 2016," said Nitesh Shah, director of commodity strategy at ETF Securities.
But some analysts said oil prices were on an unsustainable path higher with U.S. crude stockpiles hitting record highs above 543 million barrels last week with a surprising bearish build even in gasoline. NL2N18112M
"The market seems willing to latch on to any bullish news item generally," BNP Paribas (PA:BNPP) global head of commodity strategy Harry Tchilinguirian said.
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