UPDATE 8-US oil vaults above $99 on Middle East worry, spread trade
* U.S. crude hits 9-month high
* U.S. September-October crude spread widens to record high
* Brent-WTI spread falls to narrowest since January 2011
* Coming up: API weekly oil data 2030 GMT
NEW YORK, July 2 (Reuters) - U.S. crude jumped to a nine-month high above $99 a barrel on Tuesday as turmoil in the Middle East unsettled investors, while signs of tightening supply in the U.S. Midwest strengthened prompt U.S. crude prices relative to other contracts.
The spread between European Brent and U.S. WTI crude for September narrowed to less than $4 a barrel, the lowest since early 2011, as some traders rushed to cover short bets. Goldman Sachs closed its trade recommendation after the spread on the August contracts collapsed from over $23 in February to go well below its target of $5.
U.S. inter-month spreads stretched to their widest in years, with the Sept/Oct WTI spread jumping at one point to a record high of $1.24, up from just 34 cents a barrel last week.
The dramatic strengthening at the front end of the U.S. crude oil curve has been tied to the restart last month of BP's revamped 413,000 barrel-per-day Whiting refinery, which is expected to help absorb more Canadian crude oil supplies that might otherwise fill up tanks at Cushing, Oklahoma, the delivery point for the U.S. oil futures contract.
"It reflects expectations that (supplies) are going to be much tighter in the third quarter," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.
"Refinery runs are very high, and they've got room to run higher."
Oil also got a boost from turmoil in the strife-ridden Middle East, where Libyan oil output has fallen by a third after protesters shut several oilfields and anti-government demonstrations in Egypt have raised concerns about the stability of the whole region.
Brent crude futures for August delivery settled up $1.OO to $104.00 a barrel after rising 0.8 percent the previous day.
U.S. crude futures for August settled $1.61 higher at $99.60, after getting within 13 cents of the psychologically key $100 mark and reaching its highest level since Sept. 2012.
"As we get closer and closer to what looks like a coup here in Egypt, it's making front-month barrels all the more precious," said John Kilduff, partner at Again Capital LLC in New York.
"We're in the process of seeing our Midwest glut drain before our eyes, and it's causing a revaluation of the barrels depending on where they sit on the curve."
Traders and brokers also said that market players who were short September versus October were being forced out as the market moved against them.
"Right now there are a large number of market participants who play the short spread trade getting squeezed on September WTI. This move in Brent-WTI caught a lot of people unaware," said a hedge fund manager active in the energy space.
New pipeline and rail capacity has come online in recent months to alleviate the glut of crude at Cushing that has built up as more production from U.S. shale and Canadian oil sands comes into the region. Many players expect drawdowns at the oil hub to grow, supporting U.S. oil prices relative to Brent.
"Over 2 million barrels per day (bpd) of global refinery capacity will return by late July on top of the 2.5 million bpd that has returned over the past four weeks, providing ample opportunity for runs to rise," Morgan Stanley said in a note.
Prices were also supported by data on Monday from the Institute for Supply Management that showed U.S. manufacturing activity grew in June.
Investors are looking ahead to inventory reports from the American Petroleum Institute and the U.S. Department of Energy's Energy Information Administration (EIA).
U.S. commercial crude oil stocks were expected to have fallen last week due to lower imports and higher refinery activity, an extended Reuters poll of 11 analysts showed on Tuesday.