CORRECTED-UPDATE 11-U.S. oil sinks below $98, Brent gap widest since April

Tue Oct 22, 2013 10:27pm EDT

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(Corrects rise in Cushing crude stocks in paragraph eight to 423,000 barrels)

* Brent/WTI spread widens to more than $11 in heavy selling

* Coming up: EIA oil inventory data at 10:30 a.m. EDT on Wednesday

By Jeanine Prezioso

NEW YORK, Oct 22 (Reuters) - U.S. oil prices sank below $98 to their lowest in nearly four months on Tuesday, while European Brent held firm, as fears of a near-term U.S. crude surplus pushed the spread between the two oil contracts to its widest gap since April.

The onset of seasonal autumn U.S. refinery maintenance, coupled with additional spurts of pipeline outages, have curbed demand for crude, causing domestic stockpiles to swell and fueling the abrupt unwinding of the Brent-WTI oil spread, which has widened by some $3.50 a barrel in three days.

"It's a trade that's really attracting some interest and people are hopping on the Brent bandwagon and selling WTI to finance it," said Stephen Schork, editor of the Schork Report in Villanova, Pennsylvania.

U.S. crude futures for November, which expired on Tuesday, dropped $1.42 per barrel to settle at $97.80, with selling exacerbated as the front-month contract dropped below the 200-day moving average for the first time since June. The December contract ended the day $1.38 lower at $98.30.

Brent for December settled 33 cents higher at $109.97 after trading at a session high of $110.94.

The Brent/WTI spread CL-LCO1=R widened by $1.38 to end at $11.67, the widest gap since April. The spread, which stood at around $5 a barrel three weeks ago, could deter U.S. imports of overseas crude and may bolster inland margins.

Recent data showing that crude stockpiles in Cushing, Oklahoma, were rising again after a 14-week decline helped trigger selling pressure in the U.S. contract.

That oil stocks at Cushing were on the rise was further confirmed late on Tuesday when industry group American Petroleum Institute (API) showed stocks at the U.S. oil storage hub rose last week by 423,000 barrels, the second weekly increase, while U.S. crude inventories rose by 3 million barrels.

The build in crude was fairly in line with a Reuters poll calling for a 2.9 million barrel increase. The EIA will return to its normal schedule this week after the U.S. government shutdown, reporting on Wednesday at 10:30 a.m. (1430 GMT).

Earlier in the day, Brent crude drew some strength from the belated release of U.S. jobs data showing the economy added a disappointing 148,000 jobs last month, news that weakened the dollar and fuelled expectations the U.S. Federal Reserve would continue its cheap money policy.

REFINERY EBB AND FLOW

With U.S. refinery operations at a seasonal ebb due to maintenance and domestic production rising steadily, U.S. crude markets are under pressure at every turn.

U.S. output from major shale oil plays is expected to increase by 60,000 barrels per day in November from October, the U.S. Energy Information Administration said.

Still, most analysts expect the Brent/WTI slump to be temporary. Once refiners emerge from maintenance in the coming weeks they are likely to rev up crude runs to take advantage of cheaper oil and export excess fuel.

"The way this will get closed is when refineries get back online to export to Europe," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis.

LIBYA SUPPORTS BRENT

Brent oil also faces tighter supply from output cuts in Libya as the United States becomes more insulated from geopolitical shocks as supplies from shale plays multiply, analysts said.

Libya's oil production is around 600,000 barrels per day (bpd) as the government works to end protests at fields and ports that have cut shipments for months.

Tenuous relations between the United States and Saudi Arabia, the most important oil producer in the Middle East, also supported a geopolitical risk premium in Brent.

The Saudis are expected to make a "major shift" in dealings with the United States in protest against Washington's perceived inaction over the Syria war and its overtures to Iran. [ID:nL5N0IC2CP (Editing by Jonathan Leff, Andrew Hay, Andre Grenon, Peter Galloway and Nick Zieminski)

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