Oil settles above $107 in volatile trading

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U.S. oil settled modestly higher on Tuesday, after a day of volatile trading in the closely watched spread between international benchmark Brent and U.S. crude oil futures.

Brent's premium to U.S. oil futures , which had narrowed sharply last week and briefly inverted on Friday, weakened for a second straight day in whipsaw trading that saw swings of nearly $1.75. Thespread, which settled at $1.21 a barrel on Monday, narrowed to $1.06 during European hours before widening out to $2.68, near the 14-daymoving average, in early U.S. activity. It closed at $1.19 as

U.S.crude, also known as West Texas Intermediate, staged a late rally relative to Brent, before narrowing to 98 cents in post-settlement activity. The Brent-WTI spread trade has gripped markets this month, narrowing from near $6 at the start of July and over $23 a barrel in February on expectations new pipeline capacity will alleviate a glut of oil at the Cushing, Okla. delivery point for the U.S. crude contract by shipping it to the Gulf Coast.

Supply squeeze

Walter Zimmermann, chief technical analyst for United-ICAP in Jersey City,New Jersey, said that it was still early to tell if the move marked a reversal of the narrower spread, but added it could be poised to move in further.

"The bigger picture suggests that WTI just completed a bull market correction,then almost certainly the WTI-Brent spread is heading higher."

Earlier, an incident involving a shallow-water oil and gas well in the Gulf of Mexico off the coast of Louisiana, briefly caught the market's attention. The leak was at a Walter Oil and Gas well, and It led to the safe evacuation of 47 people, government officials said on Tuesday. Hercules Offshore owned the jackup rig that was drilling to prepare the well.

The U.S. Bureau of Safety and Environmental Enforcement said the well was flowing gas but no oil was being released. It added there was a "light sheen" a half mile by 50 feet across that was dissipating.

Brent and West Texas Intermediate spent much of the session languishing in ranges, as worries about demand growth in a tepid global recovery weighed on prices.

Brent crude rose by 20 cents, holding $108 a barrel. Meanwhile, U.S. crude added 29 cents to settle at $107.23 a barrel, still below last week's 16-month high as traders locked in profits on the contract's huge rally.

Brent is still up more than 5 percent this month and U.S. crude almost 10 percent, bolstered by economic optimism, supply disruption in Libya and worries about escalating violence in the Middle East.

However, analysts said economic recovery in the wake of a deep recession in many developed and emerging economies remained vulnerable to weak spending by hard-pressed consumers.

Threats to supply in the Middle East and North Africa kept a floor under prices, with new clashes in Egypt and a halt in oil exports from eastern Libya after protests.

U.S. commercial crude oil stockpiles likely fell for a fourth straight week, a Reuters poll of seven analysts showed on Monday.

The poll, taken before weekly inventory reports from the American Petroleum Institute (API) on Tuesday and the U.S. Department of Energy's Energy Information Administration (EIA) on Wednesday, forecast that crude stocks fell 2.4 million barrels on average in the week ended July 19.Protesters demanding jobs closed off the eastern Libyan port of Zueitina for a sixth day on Monday, extending a halt in oil exports, according to a senior oil industry source and one of the demonstrators.

Zueitina Oil pumps between 60,000 and 70,000 barrels per day, but its terminal has the capacity to handle about 20 percent of Libya's crude oil exports.

Also increasing supply risks, the family of Egypt's ousted Islamist president said on Monday it would take legal action against the army as his supporters and opponents clashed in street battles in central Cairo.

Any Middle East conflict raises worries of disruption to oil-producing areas or shipments, although none has taken place because of the Egyptian crisis so far.

--By Reuters.