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By Matthew Robinson
NEW YORK, July 23 (Reuters) - Oil futures edged higher onTuesday in volatile trading in the closely watched spreadbetween international benchmark Brent and U.S. crude oilfutures.
Brent's premium to U.S. oil futures , which hadnarrowed sharply last week and briefly inverted on Friday,weakened for a second straight day in whipsaw trading that sawswings of nearly $1.75.
The spread, which settled at $1.21 a barrel on Monday,narrowed to $1.06 during European hours before widening out to$2.68, near the 14-day moving average, in early U.S. activity.It closed at $1.19 as U.S. crude, also known as West TexasIntermediate, staged a late rally relative to Brent, beforenarrowing to 98 cents in post-settlement activity.
The Brent-WTI spread trade has gripped markets this month,narrowing from near $6 at the start of July and over $23 abarrel in February on expectations new pipeline capacity willalleviate a glut of oil at the Cushing, Oklahoma delivery pointfor the U.S. crude contract by shipping it to the Gulf Coast.
Walter Zimmermann, chief technical analyst for United-ICAPin Jersey City, New Jersey, said that it was still early to tellif the move marked a reversal of the narrower spread, but addedit could be poised to move in further.
"The bigger picture suggests that WTI just completed a bullmarket correction, then almost certainly the WTI-Brent spread isheading higher."
Front-month September Brent crude oil traded up 27cents to settle at 108.42 a barrel.
Brent rose early on news that China remains committed tosteering its economy towards consumption as the main growthdriver and will fine-tune policies to deal with any prolongedslowdown.
September U.S. crude futures, which became thefront-month contract on Tuesday, rose 29 cents to settle at$107.23 a barrel.
U.S. crude had been showing signs of being overbought,trading over 70 on the 14-day relative strength index, butdipped below that level on Monday. In late Tuesday activity, itagain touched 70, the level technicians say generally indicatesa commodity has been overbought.
Weekly U.S. inventory data from the American PetroleumInstitute released late Tuesday showed crude stocks fell by 1.4million barrels in the week to July 19, with unexpected declinesin both gasoline and distillate stockpiles. The market awaitedU.S. Energy Information Administration data on Wednesday.
EYES ON SUPPLIES
Traders were also closely watching supply disruptions andthreats. Enbridge Inc shut its 210,000 barrel per dayLine 81 pipeline, which carries Bakken crude from North Dakotato Minnesota following the discovery of a small leak.
The shutdown comes as traders say ongoing maintenance atSyncrude Canada Ltd's northern Alberta oil sands projectstightens supplies of light sweet crude and bolsters prices forU.S. crudes such as Light Louisiana Sweet.
In addition, traders said BP had been forced to shutin its 250,000 bpd Thunder Horse oil platform in the Gulf ofMexico as work was performed on the Destin natural gas pipelinesystem which into which Thunder Horse connects. Destin wasexpected to restart July 24.
BP said the North Sea Forties Pipeline System was operatingunder a "minor" restriction on flows that was likely to lastanother week or so.
Traders have also been focusing on violence in the MiddleEast and threats to supplies from the region, which have lentsome support to Brent prices over recent weeks.
Protesters demanding jobs closed off the eastern Libyan portof Zueitina for a sixth day on Monday, extending a halt in oilexports, according to a senior oil industry source and one ofthe demonstrators.
