* Gulf Coast sweet-sour differential below $3.50
* Valero Memphis refinery down, prompting LLS dumping
* Outage comes atop Strategic Petroleum Reserve sales
* Mars already stronger as outright prices have risen
* Refiners seek cheaper crudes to maintain margins
HOUSTON, Aug 9 Mars sour MRS- closed to within $3.50 of Light Louisiana Sweet on Tuesday as an outage at Valero's Memphis refinery added drag to Strategic Petroleum Reserve sales of sweet.
The spread between LLS and Mars more typically is in the $5 to $7 range, but cheaper Mars already was strong against LLS due to refiners' needs to control costs.
Valero (VLO.N) said on Monday units at its 180,000-barrels-per-day Memphis refinery were down due to a fire on Friday, with no estimate of restart. The refinery uses LLS. [ID: nWNAB7032]
LLS dealt for $23.15 a barrel over West Texas Intermediate CLc1 early on Tuesday, up 15 cents from the end of the previous day.
Mars Sour sold for a premium of $19.75, weaker by 25 cents than the previous session.
That left Mars some $3.40 weaker than LLS. SPR sales of light, sweet crude from Gulf Coast caverns have contributed to the LLS weakness, analysts have said.
(Graphic of LLS vs Mars: link.reuters.com/hug23s )
Cash crude spreads generally have tightened as oil prices touched record highs. Refiners have been buying cheaper grades, blending with shale oil and avoiding LLS, analysts have said.
The LLS-Mars differential narrowing came as many traders were away from their desks at an industry event in Chicago and dealing was described as "dead".
"Once futures popped back up this morning, folks took money off the table in a quiet cash market and are waiting for another opportunity to reset their positions," said Carl Larry of Blue Ocean Brokerage.
The transatlantic spread CL-LCO1=R hovered around $22.50 in favor of Brent shortly after midday, virtually unchanged from Monday's settlement, after hitting a record $23.79 in volatile trading earlier in the day.
ICE Brent crude for September LCOU1 rose 79 cents to $104.53 a barrel by 12:30 p.m. EDT (1630 GMT), having bounced as high as $105.95 after falling $5 to $98.74, the lowest intraday price since Feb. 8.
U.S. September crude CLU1 rose 78 cents to $82.09 a barrel, having bounced as high as $83.05 after falling to $75.71, the lowest since prices fell intraday to $75.60 on Sept. 29, 2010.
Amid the volatility, Brent's premium to U.S. crude surpassed the previous record of $23.57 reached on July 14. [O/R]
--------------------------------------------------------- See [CRU/TU] for recent cash crude deals) See <REF/MARGIN1> for Reuters' generic refining margins See CL-1=R for the WTI front/second month spread See CL-LCO1=R for front month WTI/Brent futures spread See BFO- for Reuters' assessment of Dated Brent See <0#FRT-> for Reuters assessed tanker rates See BRNV for assessed domestic crude differentials See PPGR for outright U.S. cash crude prices See [REF/US] for a list of U.S. refinery outages See [EIA/S] for U.S. EIA inventory reports and forecasts (Reporting by Bruce Nichols; editing by Dale Hudson)