By Matthew Robinson
NEW YORK, July 23 (Reuters) - Oil futures edged higher on Tuesday in 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.
The spread, 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-day moving 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, Oklahoma delivery point for the U.S. crude contract by shipping it to the Gulf Coast.
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."
Front-month September Brent crude oil traded up 27 cents to settle at 108.42 a barrel.
Brent rose early on news that China remains committed to steering its economy towards consumption as the main growth driver and will fine-tune policies to deal with any prolonged slowdown.
September U.S. crude futures, which became the front-month contract on Tuesday, rose 29 cents to settle at $107.23 a barrel.
U.S. crude had been showing signs of being overbought, trading over 70 on the 14-day relative strength index, but dipped below that level on Monday. In late Tuesday activity, it again touched 70, the level technicians say generally indicates a commodity has been overbought.
Weekly U.S. inventory data from the American Petroleum Institute released late Tuesday showed crude stocks fell by 1.4 million barrels in the week to July 19, with unexpected declines in both gasoline and distillate stockpiles. The market awaited U.S. Energy Information Administration data on Wednesday.
Traders were also closely watching supply disruptions and threats. Enbridge Inc shut its 210,000 barrel per day Line 81 pipeline, which carries Bakken crude from North Dakota to Minnesota following the discovery of a small leak.
The shutdown comes as traders say ongoing maintenance at Syncrude Canada Ltd's northern Alberta oil sands projects tightens supplies of light sweet crude and bolsters prices for U.S. crudes such as Light Louisiana Sweet.
In addition, traders said BP had been forced to shut in its 250,000 bpd Thunder Horse oil platform in the Gulf of Mexico as work was performed on the Destin natural gas pipeline system which into which Thunder Horse connects. Destin was expected to restart July 24.
BP said the North Sea Forties Pipeline System was operating under a "minor" restriction on flows that was likely to last another week or so.
Traders have also been focusing on violence in the Middle East and threats to supplies from the region, which have lent some support to Brent prices over recent weeks.
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.