US oil ends higher, boosted by supply expectations

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. 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.

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Brent crude rose by 50 cents to hold above $107.50. U.S. light sweet crude oil settled at $97.47, up $1.69, before slipping slightly to trade $1.60 higher at $97.32. 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 $9.92.

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 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 to fall by 2.2 million barrels, while U.S. crude stocks likely rose by 2.3 million, according to a Reuters poll.

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