UPDATE 8-Oil higher but rising crude inventories limit gains
* U.S. crude stocks rose, products fell last week - EIA
* U.S. heating oil futures gain more than 1 percent
* Dollar strength limits gains of dollar-denominated crude
* S. Korea delays oil tax decision, supports Brent futures
* Coming up: U.S. jobless claims data 8:30 a.m. EDT Thursday (New throughout, updates prices and market activity to settlement)
NEW YORK, March 27 (Reuters) - Crude oil prices rose on Wednesday in choppy trading as U.S. heating oil rallied on falling distillate inventories, while rising crude oil stockpiles in the United States and the stronger dollar limited gains.
News of fire alarms going off at Imperial Oil Ltd's site of its 121,000 barrel per day refinery near Sarnia, Ontario, sparked U.S. crude to turn higher in the hour ahead of settlement. Imperial later said the refinery was unaffected by the fire.
Earlier, U.S. crude had declined, widening its discount to Brent a day after the spread between the two crude futures contracts had narrowed to the smallest since July.
Supporting Brent prices was news that South Korea has postponed an oil tax decision by three months, according to sources with knowledge of the matter, a move that could boost demand for North Sea crudes.
Under a free trade agreement with the European Union, South Korean refiners could import North Sea crudes tax-free. The refiners would then process the crude into products for export and claim a tax rebate.
Brent May crude rose 33 cents to settle at $109.69 a barrel, after reaching $109.98, testing resistance near its 200-day moving average of $109.90. The session low was $108.85.
Brent prices were on track to post a decline of more than 1 percent for the first quarter 2013 and for the month.
U.S. May crude rose 24 cents to settle at $96.58 a barrel, having traded from $95.58 to $96.84, which was the highest intraday price in five weeks.
U.S. crude futures were on pace to finish the first quarter with a 5 percent gain and up nearly 5 percent for the month.
Helping limit crude oil price gains, the dollar index strengthened as the euro fell to a four-month low versus the U.S. currency on concerns about a weak Italian bond auction and worries over Cyprus' rescue deal.
"The externals have been a negative for oil prices with the euro falling to its lowest level since mid-November of 2012," said Dominick Chirichella of Energy Management Institute.
"The market is still uneasy about the type of deal that was done for Cyprus."
U.S. heating oil futures rose 1.8 percent, or 3.41 cents to settle at $2.9154 a gallon after the government's weekly inventory report showed distillate stocks fell 4.51 million barrels last week, much more than the 800,000-barrel drop analysts expected.
The Energy Information Administration (EIA) said U.S. crude inventories rose 3.26 million barrels, above the forecast for an increase of 700,000 barrels in a Reuters survey of analysts.
Gasoline stocks fell 1.6 million barrels, the EIA said, more than the expected drop of 1.0 million barrels, but U.S. gasoline futures managed only a 0.49 cent gain to settle at $3.1155 a gallon.
Crude oil stocks at the Cushing, Oklahoma, storage hub rose 439,000 barrels to 49.47 million, the EIA said.
Brent's premium to U.S. crude CL-LCO1=R reached $13.94 a barrel, then the spread narrowed back to end at $13.11 based on contract settlements.
On Tuesday, the premium fell as low as $12.52 during the session, the lowest since July 2012 and in retreat after pushing to the 2013 peak of $23.45 on Feb. 8.
"One of the reasons why (U.S.) crude has been rallying versus Brent was because of the trend of supplies falling at Cushing, but this build in Cushing is weighing now," said Phil Flynn, an analyst at Price Futures Group in Chicago.
Despite the bearish implications of rising U.S. crude oil supply, upbeat data in recent months has boosted confidence in the recovery of the world's top economy and No. 1 oil consumer.
Crude prices on either side of the Atlantic rose more than 1 percent on Tuesday after strong U.S. economic reports fed optimism about the economy and energy demand. (Additional reporting by Peg Mackey in London and Jessica Jaganathan in Singapore; Editing by Bob Burgdorfer and David Gregorio)
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