UPDATE 6-Brent falls on Libya supply, Fed; spread narrows
* Expectations rise of tapering at next week's Fed meeting
* Libya may reopen three oil ports this weekend
* U.S. jobless claim rose sharply last week
(Recasts throughout, adds analyst's quote, updates prices, changed byline/dateline to NEW YORK)
NEW YORK, Dec 12 (Reuters) - Brent oil futures fell on Thursday as traders anticipated an increase in Libyan oil supply and on expectations that the U.S. Federal Reserve may soon unwind its stimulus program, which has supported commodity prices.
U.S. oil rose moderately on expectations for increased demand as new pipeline projects promise to relieve a pooling glut of oil at the domestic storage hub, though the demand picture remained unclear.
The diverging prices drove the spread between the two down by more than $1 from the previous session's close.
Brent crude oil fell 81 cents to $108.89 a barrel by 11:27 a.m. EST (1627 GMT). U.S. crude futures for January delivery were up 20 cents at $97.64 a barrel.
Brent's premium to U.S. oil <CL-LCO1=R> was last trading at $11.25 per barrel, narrowing by more than $1 from the previous session.
The spread has narrowed by more than $8 in volatile trade over the last two weeks as the market grapples with whether demand for refined oil products is actually rising or whether U.S. refiners are pumping out distillates to take advantage of rich refining margins, said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis.
Changes in pipeline flows are expected to send oil from Cushing, Oklahoma, the delivery point for the U.S. oil futures contract, to U.S. Gulf Coast refiners, but it remains unclear how much of that refined oil is making it to global markets.
While refiners churned out a record amount of distillates last week, distillate stockpiles rose much more than expected, U.S. government data showed.
"The key question for the spread now is what happens to all the accumulating product," O'Grady said. "The products have to go somewhere. You can't refine and build inventory."
Ultra-low sulfur diesel (ULSD) futures, more commonly known as heating oil, fell 0.70 percent to $3.00 per gallon.
The crack, or difference, between U.S. crude oil futures and ULSD <CL-HO1=R> narrowed by about $7 from two weeks ago to trade around $28. The crack for Brent <LCO-HO1=R> has hovered around $17 for the past week.
Traders awaited news from a U.S. Federal Reserve meeting next week that will likely center on the timing of pulling back on its stimulus program, which has kept the dollar weak and supported commodities prices.
Mixed U.S. economic data has kept financial markets uncertain as to when the Fed will being to taper its $85 billion-a-month in bond purchases. The Fed has been injecting cash into the U.S. system to help pull it out of the financial crisis.
Positive employment data last week hinted that the Fed may be ready to begin curbing its stimulus as the economy recovers. The number of Americans filing new claims for unemployment benefits rose sharply last week, reversing the prior three weeks' declines, but a recent strengthening of the labor market likely remains intact.
Strong U.S. retail sales data also supported the dollar, which pressured Brent prices. A strong dollar makes commodities priced in the greenback more expensive for buyers using other currencies.
"Tapering is probably modestly bearish for all commodities," O'Grady said.
Brent prices were also pressured lower after Libyan Prime Minister Ali Zeidan said on Wednesday the government expected eastern tribes to reopen three oil ports over the weekend, including two of its largest, which have been shut since end-July.
The closure of most of Libya's oil facilities since July has underpinned international oil prices for several months. Calls for greater autonomy in the east were added onto worker strikes, which quickly developed into the worst disruption to Libya's oil industry since the civil war in 2011.
"Over the weekend you have the Libyan risk ... it's not the first time they (the government) promised ports will reopen, but we have tribal leaders saying the same this time," Olivier Jakob at Petromatrix consultancy in Switzerland said.
(Additional reporting by Julia Payne in London and Manash Goswami and Jacob Gronholt-Pedersen in Singapore; editing by Keiron Henderson, Jane Baird and Meredith Mazzilli)