Oil Rises, Following US Equities Higher

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Oil prices rose on Tuesday as traders grew bullish amid a rally in U.S. stock markets, even as U.S. pipeline bottlenecks and European economic concerns threatened to weigh on oil markets.

U.S. light, sweet crude rose 80 cents to settle at $96.66 a barrel. The March contract expires on Wednesday.

The S&P 500 stock index rose by about 0.6 percent on Tuesday. U.S. equities indices are hovering near five-year highs on prospects for quicker economic recovery, healthy U.S. corporate earnings and a spate of large corporate mergers.

"Oil traders see the rise in equities and decide to buy oil too," said Tim Evans, analyst at Citi Futures in New York. "Some might expect more oil demand driven by the equities rally. But it's likely a correlated trade flow that isn't based on oil market analysis."

U.S. oil futures rose even as the operators of the 400,000 barrel per day Seaway Pipeline from their Oklahoma delivery point to southern Texas said the line would not be able to reach full capacity in the "foreseeable future," potentially leading to surplus crude in the U.S. Midwest.

Brent crude futures rose 14 cents to $117.52 a barrel, tracking U.S. futures higher in afternoon trade, after earlier falling by more than 80 cents a barrel on European economic concerns.

"The concerns about Europe's economy have weighed on crude oil," said Phil Flynn, an analyst at Price Futures Group in Chicago.

Expectations that economic growth in France will miss the government's 2013 target and caution about Italy's election added to investor uncertainty about the outlook for the euro zone and weighed on crude prices on Tuesday.

Brent fell By as much as 83 cents a barrel earlier on Tuesday.

Brent speculators reduced their net long positions from a record high in the week to Feb. 12.

"The (Brent) price currently appears to have reached a ceiling of $118 per barrel, which could prompt short-term-oriented market players to abandon their long positions," Carsten Fritsch, a senior oil analyst at Commerzbank in Frankfurt, said.

U.S. March heating oil fell 1 percent, with March gasoline futures also slipping on Tuesday.

U.S. oil products fell in spite of news that the 600,000 barrel per day Motiva Enterprises refinery in Port Arthur, Texas, shut its gasoline-producing fluidic catalytic cracking unit on Monday night following a malfunction, according to sources familiar with the plant's operations.

Seaway Crude Oil Pipeline

Crude oil throughput on the expanded Seaway Pipeline will continue well below nominal capacity due to the mix of heavy and light crude being transported, according to a company filing with federal regulators.

The flow on the pipeline, owned by Enterprise Product Partners and Enbridge Energy Partners LP, was reversed last year to move crude south from the U.S. Midwest, where production has soared, to refineries on the Gulf Coast.

Seaway, recently expanded to a capacity of 400,000 barrels per day, should average 295,000 bpd between February and the end of May and was not expected to see flows above 335,000 bpd in "the foreseeable future," according to the filing made to the U.S. Federal Energy Regulatory Commission.

"This is bearish for U.S. oil futures," said Evans.

U.S. futures rose in spite of the Seaway note, helping to narrow Brent's premium to U.S. futures, although it remained above $20 a barrel.

(Read More: IEA Sees Iran Oil Sales Falling as Sanctions Bite)

Investors are keeping a close eye on nuclear talks between major powers and Iran set for next week. Sanctions on OPEC-member Iran have reduced its oil exports and could have fallen below 1 million bpd in January, according to estimates from the International Energy Agency (IEA).