UPDATE 8-Oil firm, Brent's premium to U.S. narrowest since Sept
* Seaway Pipeline expansion in focus
* Manufacturing in United States, China expanded in December
* Traders eye ECB meeting this week (Adds comment from analyst, paragraphs 4, 5)
By David Sheppard
NEW YORK, Jan 7 (Reuters) - Brent crude oil prices were steady above $111 a barrel on Monday while U.S. crude futures edged higher, cutting the spread between the two benchmarks by a penny to its narrowest since September as a U.S. pipeline expansion project neared completion.
The Seaway Pipeline expansion, which will bring more crude oil from the bottlenecked midcontinent market around Cushing, Oklahoma, to premium-priced refiners on the Gulf Coast, is due to be completed by Friday, the companies involved said last week.
The pipeline's expansion to 400,000 barrels per day (bpd) from 150,000 bpd should help reduce the crude oil glut around Cushing - delivery point of the U.S. benchmark futures contract - created by rapid increases in U.S. and Canadian production over the past three years.
"U.S. pipelines and infrastructure will be one of the key areas the market focuses on this year," said Andy Lebow, vice president at Jefferies Bache in New York.
"Traders were expecting the Seaway expansion to start a little later so knowing it could be flowing at a higher rate from this week has helped support U.S. crude relative to Brent."
In London, the Brent crude oil contract reversed early losses to rise 9 cents by the close, finishing at $111.40 a barrel. The February contract traded between a high of $111.67 a barrel and a low of $110.54 a barrel on the day.
The U.S. crude oil future contract for February delivery, which is delivered into storage tanks at Cushing, rose 10 cents to settle $93.19 a barrel.
Its discount to Brent narrowed to the lowest level since September, touching $17.80 a barrel at one stage, before widening back to $18.35 a barrel. In November the spread had briefly widened above $26 a barrel.
Both crude benchmarks rose last week after U.S. lawmakers reached a last-minute agreement to avert the so-called "fiscal cliff," or tax increases and spending cuts that would have threatened growth in the world's top oil consumer.
Reports on Friday showed U.S. employers kept up an even pace of hiring in December and the services sector expanded briskly. This, as well as earlier data showing expansion in U.S. and Chinese manufacturing, bolstered the outlook for oil demand.
This week, investors will watch the European Central Bank's monthly meeting on Thursday to see if it hints at an interest rate cut early this year.
Figures on Monday showed euro zone factory prices fell in November for the first time in five months, dragged by a slide in the cost of energy and giving the ECB room to consider a possible interest rate cut.
Investors will also watch the U.S. Federal Reserve's stance on monetary easing, after top Fed officials and some U.S. economists suggested the central bank might halt asset purchases this year. The euro rose slightly against the dollar on Monday.
While oil supply outages and export cuts from the North Sea, South Sudan, Iran and Nigeria supported prices in 2012, the market was expected to be in surplus in 2013.
According to the International Energy Agency, supply from outside the Organization of the Petroleum Exporting Countries will rise by 890,000 barrels per day in 2013, just ahead of the rate of global demand growth.
U.S. bank Morgan Stanley, in a report on Monday, was bearish on oil's immediate prospects.
"Although we are constructive oil for the year as a whole, we see limited near-term upside, but would look to buy dips as we approach 2H13," said the report by analysts including Hussein Allidina.
"Assuming no new supply outages, and with more predictable U.S. supply growth on track for now, we are cautiously optimistic on supply growth in 2013."
OPEC oil output fell in December, surveys showed last week, partly due to curbs by top exporter Saudi Arabia in response to lower demand. More cutbacks by the Saudis may be needed to prevent falls in prices.
"The oil price is remarkably steady, very much the same at the beginning of this year as it was a year ago. It shows what a good job the Saudis in particular are doing," said Christopher Bellew, a broker at Jefferies Bache in London.
"The question this year will be, they were good at increasing output because of shortfalls last year, will they be as good at cutting their output back as non-OPEC output grows?"
A surge in U.S. output created by advances in horizontal drilling and hydraulic fracturing - commonly known as "fracking" - have helped steady oil prices despite supply disruptions elsewhere. Brent crude oil prices averaged just under $112 a barrel in 2012, less than a dollar higher than in 2011. (Additional reporting by Alex Lawler in London and Ramya Venugopal in Singapore; editing by Leslie Gevirtz and David Gregorio)