UPDATE 7-U.S. oil rises on tight distillate supply, spread narrows
* More than 40 killed in army depot blast in Libya
* Euro at one-month high against U.S. dollar
* ULSD futures near two-month high
(Recasts to lead with U.S. oil, updates prices, adds context on distillates, spread)
NEW YORK, Nov 29 (Reuters) - U.S. oil climbed by more than $1 per barrel in light trading on Friday to narrow its discount to European Brent as the market focused on tight distillate supplies ahead of winter.
The U.S. benchmark jumped in early morning activity on short covering ahead of the weekend to narrow its discount to Brent to around $17.30 a barrel from the more than $19 discount in the previous two sessions, market participants said.
Brent oil rose slightly and was on track for the biggest monthly gain since August due to supply disruptions caused by unrest in Libya.
U.S. ultra low sulfur diesel futures (ULSD), more commonly known as heating oil, touched a near two-month high.
The market focused on dwindling distillates rather than growing U.S. oil supplies, and traders bet that oil prices would rise as refiners pump out heating fuels to supply Europe and the United States for winter heating.
U.S. inventories of distillates dropped to their lowest level for November since the government began tracking stocks in 1982, as refiners send record volumes of the fuel abroad, leaving a potentially tight supply scenario ahead of the heart of winter.
Brent traded up 9 cents to $110.95 at 11:54 a.m. EST (1654 GMT), on track for 2 percent monthly rise.
U.S. oil rose $1.32 to $93.62 a barrel, off from the earlier high of $93.90. There was no settlement for U.S. futures on Thursday because of the Thanksgiving holiday in the United States. Oil trading on the New York Mercantile Exchange will close one hour earlier at 1:30 p.m. EST on Friday.
ULSD futures rose 1.31 cents to $3.06 per gallon, after trading up to $3.0710, the highest price since Oct. 10.
The weaker U.S. dollar "coupled with strong data out of Europe" also supported the outlook for demand and forced some short covering in the market, according to Bill Baruch, senior market strategist at iitrader.com in Chicago.
The euro was at a one-month high against the dollar after data showed the first drop in euro zone unemployment in three years. A falling dollar makes it cheaper for holders of other currencies to purchase dollar-denominated commodities like oil.
Brent oil also found support from ongoing disruptions and violence in OPEC member Libya. More than 40 people were killed in an explosion at an army depot in southern Libya after locals tried to steal ammunition, the latest in a series of clashes highlighting the government's inability to restore order.
Libya's oil exports are down to a fraction of capacity due to seizures of oilfields and ports by militias, tribesmen and civil servants demanding more political rights or higher pay.
Expectations that more Iranian crude will come back to the market capped prices. Iran and six world powers clinched a deal on Sunday to curb its nuclear program in exchange for initial sanctions relief.
(Additional reporting by Peg Mackey in London and Manash Goswami in Singapore; Editing by William Hardy, Tom Pfeiffer and Bob Burgdorfer)