UPDATE 7-US crude tops $101 on stocks draw, Egypt; spreads cool
* US crude stocks post biggest summertime drop in 13 years-EIA
* U.S. crude stocks fell by 9.4 mln barrels last week - API
* U.S. heating oil, gasoline futures higher
* Weak Chinese data still weighs on oil market
(Recasts in entirety, adds details throughout, updates prices. Changes byline/dateline to New York, prev. London).)
NEW YORK, July 3 (Reuters) - Oil prices powered higher for a third day on Wednesday, with the New York contract hitting a 14-month high, as traders fretted about unrest in Egypt and reacted to a rapidly tightening supplies in the U.S. domestic market.
While U.S. crude pushed above $101 a barrel, for a weekly rally of nearly 5 percent, many traders were still fixated on ructions in key spreads trade, with the premium of European Brent crude over U.S. WTI touching its highest since 2010 before beginning to unwind amid an easing short squeeze.
U.S. weekly inventory data showing that stockpiles fell by more than 10 million barrels, the biggest drop for this time of year in nearly 13 years, added to earlier gains that had been fuelled by worries the unrest in Egypt could destabilize the Middle East, which pumps a third of the world's oil.
The sharp drawdown in crude stocks is "something that nobody anticipated," said Addison Armstrong, director of market research with Tradition Energy in Stamford, Connecticut. Although analysts have been looking for inventories to ebb, the drop was nearly five times larger than forecasts.
In Egypt, President Mohamed Mursi rejected an army ultimatum to step down. While the Suez Canal Authority said there was no sign of the political turmoil disrupting up to 2.4 million barrels per day of oil transit, traders were edgy.
"This is on fears that somehow the situation there could collapse and you'd have a power vacuum," Armstrong said.
Front-month U.S. crude oil futures were up $1.76 at $101.36 a barrel by 1:32 p.m. EDT (1732 GMT), having touched a session high of $102.18 in earlier trade. The contract blew past the 10- and 15-day moving averages on a continuation chart in the last two sessions.
Brent crude oil futures were last trading $1.83 higher at $105.83 after reaching $106.03, nearly touching the 100-day moving average at $106.04.
U.S. gasoline futures and heating oil futures rose to their highest levels in more than a week and were last trading at $2.85 per gallon and $2.96, respectively.
BRENT/WTI SPREAD OVERDONE, CHINA DEMAND WEIGHS
Brent's premium to West Texas Intermediate crude <CL-LCO1=R> at one point narrowed to $3.09, the weakest since December 2010, but widened to around $4.75 per barrel in afternoon trading.
Projects aimed at shifting crude from the oversupplied hub of Cushing, Oklahoma, to refineries on the Gulf Coast are expected to lower transport costs and shrink the price gap between Brent and WTI.
The spread was largely a "momentum" trade, said Armstrong, as nothing fundamental in the market had changed. Traders are likely to take bets off the table in the spread as well as straight oil trades later this week or early next week after this run higher.
"I think we're getting a little overdone to the high side," he said.
Crude prices were somewhat capped on weak Chinese economic data. China is the world's second largest oil consumer.
A survey showed June growth in China's services sector at its weakest for nine months. This follows reports that showed China's manufacturing growth plumbed multi-month lows in June as foreign and domestic demand waned.
(Additional reporting by Peg Mackey, Dmitry Zhdannikov and Christopher Johnson in London and Florence Tan in Singapore; Editing by Jeff Coelho, Jason Neely and Bob Burgdorfer)