Brent crude prices dipped on Monday while U.S. oil futures rose as news of a key U.S. pipeline expansion will be completed next month and optimism about a deal to avoid the "fiscal cliff'' prompted spread trading between the two contracts.
The discount of U.S. crude to the international Brent benchmark narrowed by $1 following news Enterprise Products Partners LP and partner Enbridge would complete a 350,000 barrel per day (bpd) expansion to the 150,000 bpd Oklahoma to Texas Seaway pipeline in early January.
The increased capacity will allow more crude to the Gulf Coast from the Cushing, Oklahoma delivery point for the U.S. oil futures contract, where a glut of oil from rising Canadian and U.S. flows has depressed domestic prices relative to coastal and international prices. (Read More: Oil Market Going Through 'Violent' Structural Change)
Further support for U.S. crude came after President Barack Obama and Republican House Speaker John Boehner met for talks to resolve the U.S. budget crisis. Equities markets also rose on the optimism around the discussions, which have held sway over oil markets for weeks amid trader concern failure to reach a deal could cause a recession and damp fuel demand.
"Hopes for a budget deal have the equities market putting in a good day and U.S. crude has followed along,'' said Addison Armstrong at Tradition Energy in Stamford Connecticut, adding the "outlook for pretty weak economies in Europe have helped limit Brent.''
Brent crude futures fell 54 cents to settle at $107.64 a barrel. Brent hit a 2012 high of $128 in March and is on course to end the year little changed in percentage terms as economic worries have countered price-supporting supply disruptions in the Middle East and other regions such as the North Sea.
The front-month U.S. light, sweet crude futures rose 47 cents to settle at $87.20 a barrel, with prices finding some resistance after briefly topping the 50-day moving average at $87.66 a barrel.
Tempering enthusiasm about the U.S. economy, the New York Federal Reserve said in a report released on Monday that manufacturing in New York State declined for a fifth straight month in December and the labor market remained weak. U.S. gasoline futures briefly traded higher on news of a small fire at Motiva Enterprises' 325,000 barrel-per-day crude unit at the Port Arthur, Texas, refinery.
The company said it was still targeting full restart of the unit, which was shut due to pipe problems earlier in the year, for early 2013.
Traders were also awaiting weekly U.S. inventory data from the American Petroleum Institute and U.S. Energy Information Administration, due out on Tuesday and Wednesday, respectively, for market direction.
A Reuters poll of analysts forecast the data would show a drawdown in crude oil stocks last week as refiners ran down inventories for end-year tax purposes, while fuel stockpiles were expected to show a corresponding build.