UPDATE 6-Oil wavers near $108, profit-taking cools WTI rally
* Hedge fund bets on U.S. oil prices hit record level
* Strong WTI September/October backwardation draws investors
* G20 puts growth before austerity, vows to tread carefully
(Updates prices, spreads, and adds comments on the future of WTI)
NEW YORK, July 22 (Reuters) - U.S. oil prices pulled back from last week's 16-month high on Monday as traders locked in profits from a blistering rally that briefly sent U.S. crude to a premium over Brent for the first time in nearly three years.
European marker Brent regained its premium over West Texas Intermediate on Monday, with the September <CL-LCO1=R> contract 57 cents higher as the squeeze on prompt U.S. supplies eased ahead of the August NYMEX contract expiration later in the day.
"We thought $110 was a price target but the more the market dips into this range the more you'll see profiteers," said Rich Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago.
The WTI contract for August delivery lost 71 cents and had fallen to $107.34 by 11:25 a.m. EDT (1525 GMT). September Brent crude also fell, dropping 23 cents to $107.84.
September WTI fell 74 cents to $107.29, converging with the front-month contract as traders settled their August positions. The October WTI contract was significantly weaker, trading at $1.57 below the September price.
Gasoline futures fell more sharply than crude, dropping 1.4 percent to $3.0780 a gallon, even as Valero reported its gasoline-making unit at its Port Arthur, Texas, refinery, is expected to be shut through late July. Gasoline futures hit a 4-1/2 month high on Friday at $3.16.
The convergence of the two front-month crude benchmarks comes as increased pipeline capacity has drained the glut of oil at the WTI delivery point of Cushing, Oklahoma, to the U.S. Gulf Coast, where refinery demand has been high.
The easing of the Cushing glut has not led to lower prices at the Gulf Coast as refineries there are eager to cash in on robust margins and exports.
The price rally has also been driven by concerns that the market is flipping from glut to drought, fueling a sharper run in prompt contracts to create a backwardated market, with near-term prices higher than those further in the future.
"The extraordinarily strong backwardation is strengthening and bringing everyone into the WTI," said Olivier Jakob, an analyst at Petromatrix in Zug, Switzerland.
Brent could garner support from a stronger demand growth outlook and supply risks in the Middle East and Sudan, according to Carsten Fritsch, analyst at Commerzbank.
Hedge funds amassed record bets on rising U.S. crude oil prices in the week to July 16, trade data by the U.S. Commodity Futures Trading Commission (CFTC) showed.
A pledge on the weekend by the Group of 20 nations, which account for 90 percent of the world economy, to put growth before austerity has fueled hopes of a recovery in the consumption of commodities.
The market watched also closely as Japanese Prime minister Shinzo Abe won a decisive victory in upper house elections, which was seen as a boost for his radical economic stimulus policies.
(Additional reporting by Manash Goswami; Editing by Richard Pullin, Jeff Coelho and Peter Galloway)