* Protest group in Libya discusses possible end to blockade
* WTI-Brent spread narrows as TransCanada fills pipeline
* U.S. inventories down 2.7 mln barrels last week -poll
* Coming up: US API oil stocks at 4:30 p.m. EST (2130 GMT
(Updates prices to settlement, adds Libya development)
NEW YORK, Dec 10 (Reuters) - U.S. crude rose on Tuesday as market participants digested news of progress toward the opening of a major pipeline that will transport oil from the U.S. Midwest to the Gulf, helping drain crude from Cushing, Oklahoma, the pricing point for the futures contract.
The news presaged further drawdowns in overall U.S. crude oil inventories for a second straight week. A Reuters poll estimated the drawdown at 3 million barrels in the week ended Dec. 6, following on the previous week's drain of 5.6 million barrels.
Brent traded largely flat on Tuesday after losing nearly $1 on reports of a possible end to the months-long blockade of east Libyan oil terminals.
The prospects of increased supply of Brent and less landlocked U.S. crude helped narrow the spread between the two to a month-low of $10.48 earlier in the session.
"The Brent-WTI spread has gone from below $10 to above $19 and now around $10 in the last five weeks, and now maybe we'll get Libyan production back in excess of 1 million barrels," said Gene McGillian, an analyst at Tradition Energy in Stamford, Connecticut.
"Now I think it's going to come down to what kind of inventory report we see."
Brent for January fell 1 cent to settle at $109.38, after swinging between $108.55 and $110.45 during the session. Brent dropped 2 percent on Monday, its biggest loss in five weeks.
U.S. light crude futures for January gained $1.17 to finish at $98.51, after hitting a six-week high of $98.74 earlier in the session.
Brent's premium to U.S. crude <CL-LCO1=R> stood at $11.18.
Leaders of a movement seeking autonomy for Libya's eastern Cyrenaica region said on Tuesday they could allow oil exports to resume on Dec. 15 from several ports if Tripoli meets their demands and allows the region to take its share of crude. Movement leaders said the group is set to begin trying to sell crude oil on its own if the government does not meet its demands.
However, Libya's oil workers union threatened on Tuesday to close its eastern ports again if regional separatists decide to reopen them on Dec. 15.
The disruption has restricted Libyan oil output to 250,000 barrels per day (bpd), down from 1.4 million bpd in July, and supported the price of Brent.
U.S. crude oil or West Texas Intermediate (WTI) rose over $1 earlier in the session on news that TransCanada Corp began filling a 700,000 bpd pipeline that will transport crude from Cushing to Gulf Coast refiners. The company did not say when it expects the line to begin commercial service, but a filing with the U.S. Federal Energy Regulatory Commission last week said it expects the pipeline to be in service by Jan. 3.
A short-term energy outlook report from the U.S. Energy Information Administration (EIA) revised up estimates for global oil demand and U.S. gasoline demand, giving both crude oil benchmarks a boost shortly after noon EST. The report raised the forecast increase for world oil demand to 1.15 million barrel per day year-on-year in 2014.
"There were some surprises in there, and it gave the market something to latch on to," said Phil Flynn, an energy analyst at the Price Futures Group in Chicago.
A fall in the value of the U.S. dollar helped to cap losses. The U.S. currency hit a six-week low against the euro, increasing the purchasing power for consumers who buy oil priced in dollars.
"The dollar was weak today and maybe there was some sympathetic buying with other commodities," said Andy Lebow, vice president at Jefferies Bache in New York.
"The market 1/8for WTI 3/8 got above $98 which had been a formidable resistance point."
Market participants await data on U.S. crude inventories from industry group the American Petroleum Institute to be released at 4:30 p.m. EST (2130 GMT).
(Additional reporting by Joshua Franklin in London, Florence Tan and Manash Goswami in Singapore; Editing by Christopher Johnson, Peter Galloway, Phil Berlowitz and Chizu Nomiyama)