UPDATE 3-Oil holds firm before US stockpile data
* Sentiment up on Japan stimulus plan, German confidence
* Israel elections reduce risk of Iran strike, analysts say
* US to extend debt limit by 4 months, defusing default fear
* Coming Up: API weekly oil inventories; 2130 GMT
(Updates throughout, changes dateline from SINGAPORE)
LONDON, Jan 23 (Reuters) - Brent crude oil held steady above $112 a barrel on Wednesday as investors awaited inventory data from the United States for clues to demand in the world's largest oil consumer.
Brent crude was 10 cents up at $112.52 a barrel by 1023 GMT. U.S. crude for March rose 11 cents to $96.79, off a four-month high of $96.90 hit earlier.
Appetite for riskier assets was buoyed on Tuesday by the Bank of Japan's plans to shore up the world's third largest economy and strong investor confidence data from Germany.
These added to upbeat economic data this month from the top two economies, the United States and China.
But oil underperformed, pressured as a narrower victory for hawkish Israeli Prime Minister Benjamin Netanyahu's right-wing party at the expense of the centre-left was seen as limiting chances of an Israeli strike on Iran.
"The elections have not increased the risk of Israel attacking Iran. The composition of the parliament seems to point that he would not have a very strong majority to attack," according to Olivier Jakob, analyst at Petromatrix in Zug, Switzerland.
Brent crude reached its highest in around three weeks on Tuesday, and is close to a three-month high, supported by relatively benign economic data from the United States and China and more optimism in the markets in recent months.
"Crude oil has been relatively well supported since the start of the year now the question is where do we go from here. Volatility is pretty low right now but it could increase," Jakob said.
BRENT-U.S. CRUDE SPREAD
In the United States, West Texas Intermediate (WTI) crude futures rose this month, narrowing their spread with Brent <CL-LCO1=R> to less than $16, after the expanded Seaway oil pipeline started operations and eased a glut in the Midwest region.
Morgan Stanley analysts said they expect the Brent-WTI spread to stay between $10 and $20 a barrel at least in the first half of 2013 as the pipeline expansion will not be enough to clear the bottleneck at Cushing, Oklahoma, the delivery point for WTI contracts.
The Obama administration has delayed a decision on TransCanada Corp's rerouted Keystone XL oil pipeline until after March, even though Nebraska's governor on Tuesday approved a plan for part of the line through his state.
"The sentiment from investors is getting better than before but it may take one to two years (for investors) to be really confident about rapid economic growth," said Ken Hasegawa, a commodities sales manager at Newedge Japan.
"So the oil market may move in a narrow range this year, not as volatile as last year."
The American Petroleum Institute will release weekly U.S. oil inventory data later on Wednesday, delayed a day by a holiday. Data from the U.S. Energy Information Administration will be released on Thursday.
The data is expected to show builds in U.S. crude, gasoline and distillate inventories, according to a Reuters poll of analysts.
(Additional reporting by Florence Tan and Seng Li Peng in Singapore; editing by James Jukwey)