UPDATE 9-Oil collapses by $3, Libyan supply weighs, storm hits demand
* Libya hopes to restart El Sharara oilfield in days
* China factory activity slows in December - government, HSBC
* Traders expect a build at Cushing - market sources
* Coming up: EIA oil inventory data on Friday
(Recasts top paragraphs, updates to settlement prices)
NEW YORK, Jan 2 (Reuters) - Oil prices collapsed on the first trading day of 2014 as Libya prepared to restart a major oilfield, and with speculation of a sharp rise in crude stockpiles in Cushing, Oklahoma.
Prices were also undermined by expectations of a further dip in fuel demand as a winter storm bore down on the northeastern United States.
A decrease in U.S. jobless claims and increase in manufacturing activity strengthened the U.S. dollar on forecasts the U.S. Federal Reserve will continue to slow its stimulus program, pressuring oil prices. A weakening stock market further added to losses.
U.S. crude oil finished with the largest daily percent loss in more than a year, after ending last year with a more than 7 percent gain. After finishing unchanged from where they started in 2013, Brent futures ended the first trading day of the new year with the biggest percent decline in six months.
"Really what's moving the market back down is Libya back online," said Bill Baruch, senior market strategist at iitrader.com in Chicago. "We didn't expect them to be back until the end of Q1."
Libya's National Oil Corp (NOC) said on Thursday it plans to restart the El Sharara oilfield and hopes to resume output within days after protesters agreed to suspend a strike that has blocked the field since the end of October.
Libya's output is still less than 250,000 barrels per day (bpd), down from 1.4 million bpd in July.
Brent crude ended $3.02 a barrel lower at $107.78, the largest one-day percentage drop since late June.
U.S. crude sank by as much as $3.08 per barrel to a low of $95.34, after breaking a key technical level. The contract settled $2.98 lower at $95.44, its largest one-day percent drop since November 2012.
Losses deepened earlier in the session after a report by industry group Genscape showed a one million barrel rise in stockpiles at Cushing, Oklahoma, the benchmark delivery point for U.S. oil futures, market sources said.
Official U.S. government data, due out two days later than usual at 11 a.m. EST (1600 GMT) on Friday due to the New Year's Day holiday, is expected to show a fifth consecutive draw in nationwide crude oil stockpiles.
Data from the American Petroleum Institute on Tuesday showed stocks fell last week by nearly double the expectation in a Reuters poll. The decline has been largely attributed to producers' attempts to avert taxes and is no match for U.S. production which has risen to a 25-year high, analysts said.
STORM WEIGHS ON FUEL FUTURES
Motor fuel prices matched crude's losses as a powerful storm expected to bring heavy snow and Arctic cold to the densely populated U.S. Northeast will likely force motorists off the road, said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania.
"I think with gasoline it could potentially be 70 million (people) in the path of two converging snowstorms and that will impact demand," he said. "It's already happened in the Midwest."
U.S. ultra low-sulfur diesel (ULSD) futures fell 2.5 percent to $2.9867 per gallon while RBOB gasoline futures fell 3.2 percent to $2.6950.
As well, more than 1,500 flights were cancelled in the United States due to the storm, according to web site FlightAware.com.
"People aren't driving, people aren't flying," Baruch said. "A lot of fuel is not being consumed."
IRAN AND THE DOLLAR
Adding to pressure on oil, growth in factory activity in China slowed in late 2013, according to purchasing managers' indexes published by the government and HSBC, weighed by shrinking export orders.
U.S. stocks extended their fall in late afternoon trade on Thursday. The S&P 500 declined 1 percent.
A strong dollar weighed as dollar-priced commodities become more expensive for holders of other currencies. The U.S. dollar index, a measure of the dollar's strength against a basket of currencies, rose to a two-week high.
The market also eyed potential increased oil output from Iran. The Islamic Republic and six world powers will implement an agreement in late January obliging Tehran to suspend its most sensitive nuclear work, an Iranian official was quoted as saying on Tuesday.
That raises the prospect of an increase in Iranian crude exports over 2014, some analysts said.
(Additional reporting by Peg Mackey in London and Florence Tan in Singapore; Editing by William Hardy, Anthony Barker, Meredith Mazzilli, Diane Craft and Chris Reese)