UPDATE 10-Oil slips as Fed news awaited, Brent-WTI spread narrows
* U.S. crude inventories down last week - poll
* Market awaits Fed comment on stimulus program
* TransCanada Gulf pipeline expected in service on Jan. 22
NEW YORK, Dec 17 (Reuters) - Brent oil fell by nearly $1 on Tuesday, pressured by the spectre of the U.S. Federal Reserve tapering its monetary stimulus program. U.S. oil also ended lower, but not by as much, tightening the spread between the two benchmarks.
The Fed's policy-making Federal Open Market Committee is meeting on Tuesday and Wednesday during which officials could decide to trim the Fed's $85 billion asset purchasing program, should they interpret recent strong U.S. economic data to mean the economy is recovering.
Scaling back the program could boost the dollar and weigh on dollar-denominated commodities, including oil, and indirectly curb investment flows into those markets. The U.S. dollar index , a measure of the greenback against a basket of currencies, was virtually flat, after rising in mid-afternoon trading.
Oil prices fell, U.S. stocks edged lower and U.S. gold futures plunged by more than 1 percent on Tuesday as markets awaited news from the Fed.
"A stronger dollar at least temporarily is putting a downward pressure on the market, especially Brent," said Rich Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago.
Traders also sold Brent to take profit after prices gained 1.5 percent in the previous session on the back of continued unrest in Libya, which curtailed oil supply.
Brent futures for February settled 97 cents lower at $108.44. U.S. crude oil futures settled 26 cents lower at $97.22, after trading as high as $97.90.
Brent fuelled losses in ultra low-sulfur diesel futures , which ended 2.73 cents lower at $2.9629 per gallon.
Brent's premium to U.S. oil tightened by more than $2 per barrel to $10.97.
The spread has contracted since the end of November. TransCanada Corp said it would begin filling a pipeline that will transport crude from the Cushing, Oklahoma, storage hub to the Gulf Coast. On Tuesday, the company's chief executive said he expects the 700,000 barrel-per-day (bpd) pipeline to begin service on Jan. 22.
Trading volumes were thin on Tuesday and were expected to remain so as many hedge funds have closed their books for the year and a pre-holiday market lull sets in, analysts said.
Losses in U.S. oil were capped by expectations that inventory data on Tuesday and Wednesday would show a draw in stockpiles.
Commercial crude inventories fell an average of 2.3 million barrels last week because of declining imports, a preliminary Reuters poll of analysts showed.
The expectation for a draw, which would be the third in as many weeks, does not present an accurate supply and demand picture since storage holders tend to offload oil at year-end to avoid paying taxes on supplies, analysts said.
U.S. crude oil stocks declined by 2.5 million barrels while stocks at Cushing fell by 817,000 barrels, data from the American Petroleum Institute showed on Tuesday.
Gasoline and distillate stocks also fell, API data showed, compared to expectations for a build in the Reuters poll.
The U.S. Energy Information Administration (EIA) will publish its data on Wednesday at 10:30 a.m. EST (1530 GMT).
Strikes at French refineries also pressured Brent by cutting into crude demand. As a corollary, this might boost demand for U.S. oil products, said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis.
"The opportunities of exporting product are still attractive," O'Grady said. "Refinery strikes will encourage even more U.S. sales."
In France, refinery workers at Total's French 99,000 bpd Grandpuits refinery voted to end their five day strike on Tuesday afternoon, a union official at the plant said.
This leaves the sites of Feyzin, Gonfreville and La Mede on strike, representing a total refining capacity of 613,000 bpd.
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