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Oil Settles Above $111 With Supply in Focus

Brent crude oil prices slipped toward $111 a barrel on Monday while the U.S. futures contract held firm, narrowing the spread between the two benchmarks to the lowest level since September as traders eyed the anticipated start-up of a Midwest pipeline.

The Seaway Pipeline expansion project, which will increase the amount of crude oil flowing from the bottlenecked market around Cushing, Oklahoma, to premium-priced refiners on the Gulf Coast, is due to be completed by Friday, the companies involved said last week.

The pipeline's expansion to 400,000 barrels per day (bpd) from 150,000 bpd should help reduce the crude oil glut around Cushing - delivery point of the U.S. benchmark futures contract - created by rapid increases in U.S. and Canadian production over the past three years.

In London, Brent crude settled up nine cents at $111.40 a barrel, and traded between a high of $111.54 a barrel and a low of $110.54 a barrel on the day.

U.S. crude for February delivery, which is delivered into storage tanks at Cushing, traded around $93.26 a barrel. Earlier, its discount to Brent narrowed to the lowest level since September, touching $17.80 a barrel.

Both crude benchmarks rose last week after U.S. lawmakers reached a last-minute agreement to avert the so-called "fiscal cliff," or tax increases and spending cuts that would have threatened growth in the world's top oil consumer.

"There is a bit of risk-off sentiment in the market today," said Carsten Fritsch, an analyst at Commerzbank. "Maybe also a bit of profit-taking after the gains late last year and early this year."

Still, reports on Friday showed U.S. employers kept up an even pace of hiring in December and the services sector expanded briskly. This, as well as earlier data showing expansion in U.S. and Chinese manufacturing, bolstered the outlook for oil demand.

This week's focus for financial markets will be on the European Central Bank. Investors are looking to the central bank's monthly meeting on Thursday to see if it hints at an interest rate cut early this year.

Figures on Monday showed euro zone factory prices fell for the first time in five months in November, pulled down by a slide in the cost of energy and giving the ECB room to consider another interest rate cut.

Investors will also be watching the U.S. Federal Reserve's stance on monetary easing,after top Fed officials and some U.S. economists suggested the central bank might halt its asset purchases this year.

Limited Upside

While oil supply outages and export cuts from the North Sea, South Sudan, Iran and Nigeria supported prices in 2012, the market was expected to be in surplus in 2013.

According to the International Energy Agency, supply from outside the Organization of the Petroleum Exporting Countries will rise by 890,000 barrels per day in 2013, just ahead of the rate of global demand growth.

U.S. bank Morgan Stanley, in a report on Monday, was bearish on oil's immediate prospects.

"Although we are constructive oil for the year as a whole, we see limited near-term upside, but would look to buy dips as we approach 2H13," said the report by analysts including Hussein Allidina.

"Assuming no new supply outages, and with more predictable U.S. supply growth on track for now, we are cautiously optimistic on supply growth in 2013."

OPEC oil output fell in December, surveys showed last week, partly due to curbs by top exporter Saudi Arabia in response to lower demand. More cutbacks by the Saudis may be needed to prevent falls in prices.

"The oil price is remarkably steady, very much the same at the beginning of this year as it was a year ago. It shows what a good job the Saudis in particular are doing," said Christopher Bellew, a broker at Jefferies Bache in London.

"The question this year will be, they were good at increasing output because of shortfalls last year, will they be as good at cutting their output back as non-OPEC output grows?"

A surge in U.S. output created by advances in horizontal drilling and hydraulic fracturing - commonly known as "fracking" - have helped steady oil prices despite supply disruptions elsewhere. Brent crude oil prices averaged just under $112 a barrel in 2012, less than a dollar higher than in 2011.