UPDATE 10-Oil rises, Brent/WTI spread narrows on Keystone news
* TransCanada sees Keystone pipeline startup by year-end
* U.S. crude, gasoline stocks rise in past week -EIA
* Cushing oil stocks down for 13th successive week
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By Jeanine Prezioso
NEW YORK, Oct 2 (Reuters) - Crude oil prices ended with their largest gain in two weeks on Wednesday following news that TransCanada Corp's Keystone XL Gulf Coast pipeline would start up by the end of the year.
The news narrowed the premium for Brent oil futures over U.S. oil futures, known as West Texas Intermediate (WTI), to its smallest level in a week, briefly dropping below $5 a barrel.
The southern portion of TransCanada's 700,000 barrel per day crude pipeline was 95 percent complete and the company was focused on starting the line that will move crude from Cushing, Oklahoma, the delivery point for WTI futures, to the Gulf Coast refining center by the end of the year, a TransCanada spokesman said.
Traders who were holding long Brent oil positions and short positions on WTI were forced to buy the U.S. oil contract to cover bets once prices began to rise, which drove a further price spike, said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
"Some people got caught wrong-footed on the pipeline announcement and got held to the fire," he said.
U.S. oil futures ended the day $2.06 per barrel higher, or up 2.02 percent, at $104.10, after trading as high as $104.23. Brent gained $1.25 or 1.16 percent to finish at $109.19.
U.S. crude ended with its largest daily percentage gain since Sept. 18 as did Brent.
Brent's premium over U.S. crude oil ended at $5.09 per barrel, after narrowing to $4.99, its smallest level in a week.
The spread has narrowed sharply from more than $23 a barrel in February as new capacity has come on stream to move crude out of Cushing, or divert it away from Cushing, to the Gulf Coast.
Over the past 13 weeks, crude inventories at the hub have fallen nearly 17 million barrels, according to data from the U.S. Energy Information Administration. Draws have been declining in recent weeks, with stockpiles at Cushing down just 59,000 barrels in the week to Sept. 27, the EIA reported on Wednesday.
Crude oil prices were also supported by a weaker U.S. dollar as commodities priced in the dollar become less expensive for holders of other currencies. The dollar was under selling pressure as a U.S. government shutdown entered a second day with no end in sight.
The dollar index, a measure of a basket of currencies against the greenback, fell to its lowest level since early February at $79.781. It was last at $79.881.
"The Keystone news gave you the fundamental justification to buy on the plunge in the dollar," said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania.
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