UPDATE 7-U.S. crude rises nearly $2 on spread trading, pipelines

* Brent-WTI spread falls below $10

* Global equities markets steady

* U.S. crude inventories seen up, distillates down - poll

* API weekly oil data due 4:30 p.m. EST (2130 GMT)

NEW YORK, Jan 28 (Reuters) - U.S. crude oil futures rose nearly $2 on Tuesday, narrowing their discount to European Brent, as traders expected data to show supplies were draining from the contract's benchmark delivery point.

Market perception that the gradual start-up of TransCanada Corp's Keystone pipeline would transport supplies from oil hub Cushing, Oklahoma, where the U.S. crude oil contract is priced, to the Gulf Coast supported prices.

A lack of pipelines has kept U.S. prices depressed relative to Brent oil for the last three years.

"The Brent/WTI spread is contracting a bit more, and that always helps crude prices," said Tariq Zahir, managing member of commodity trading advisor Tyche Capital Advisors in New York. "The market is expecting a little bit more of a draw at Cushing since that pipeline has opened up. It's a volatile trade."

Brent oil also rose but not as high, reversing Monday losses spurred by concerns over turmoil in emerging markets and a perceived economic slowdown in China.

Brent crude touched a high of $107.79 a barrel, up $1.10, but slipped to $107.40 by 1:40 p.m. EST (1840 GMT). On Monday, Brent fell $1.19, its biggest loss since Jan. 2.

U.S. light crude oil touched a high of $97.66, up $1.94, before slipping slightly to trade $1.57 higher at $97.29.

Based on the 200-day moving average for U.S. crude's front month contract, analysts said $96.20 has proven to be a supportive level.

"It's been a major pivot point since Friday and was again today," said Bill Baruch, senior market strategist at iitrader.com. "Once it rose above $96.20 (Tuesday), it rose another $1."

The spread between the two benchmarks narrowed by as much as $1.20 to a low of $9.77 on Tuesday. It was last trading at $10.13.

U.S. crude was also supported by analysts' projections for a drop in distillate inventories, including heating oil and diesel fuel, as demand rose over a brutally cold winter across the Northern Hemisphere.

The front-month contract for U.S. ultra low-sulfur diesel (ULSD), commonly known as heating oil, rose 1.65 cents to trade at $3.1089 per gallon. It traded lower earlier in the session as traders sold positions ahead of Friday's expiration of the February contract.

The market awaited U.S. inventory data set for release by the American Petroleum Institute Tuesday at 4:30 p.m. EST (2130 GMT).

Analysts on average expect distillate stocks, including heating oil and diesel fuel, to fall by 2.2 million barrels, while U.S. crude stocks likely rose by 2.3 million, according to a Reuters poll.

The U.S. Energy Information Administration publishes its data on Wednesday at 10:30 a.m. EST (1530 GMT).

Meanwhile, global equities markets steadied after three days of intense selling. The U.S. government reported a drop in durable goods orders, and industry group The Conference Board reported consumer confidence rose to its highest point since September. 1/8ID: nL2N0L20UH 3/8

Investors continued to watch the U.S. Federal Reserve as it considers tapering the bond-buying program.

The central bank is expected to approve a $10 billion cut to its monthly bond buying stimulus. A rollback would support the dollar, weighing on commodities priced in the currency.

Investors have been concerned about the withdrawal of market-friendly U.S. monetary stimulus and turmoil in emerging markets.

In the world's second-largest oil consumer, China's factory activity likely cooled in January to a six-month low, a Reuters poll showed, underscoring views that a slowdown has continued into 2014.