UPDATE 2-Brent edges toward $109 on optimism Yellen to assure markets
* Dovish Yellen testimony would assure oil markets
* U.S. crude above $100 a barrel on cold weather, expectations of slower tapering
* U.S. distillate stocks seen falling last week
* Coming up: Fed Chair Yellen testimony to Congress at 1500 GMT
* API weekly U.S. inventory report at 2130 GMT (Adds comments, details on price spread, updates prices)
By Jacob Gronholt-Pedersen
SINGAPORE, Feb 11 (Reuters) - Brent crude edged toward $109 a barrel on Tuesday on cautious optimism that the Federal Reserve's new head will signal that it will pursue slower stimulus tapering to reduce the risk of hampering the world's biggest economy.
Following recent mixed U.S. economic data, all eyes are on Fed Chairwoman Janet Yellen in her first testimony to Congress on Tuesday and Wednesday.
Brent crude for March delivery was up 1 cent at $108.64 per barrel at 0523 GMT, after settling 94 cents lower. The contract, which expires on Thursday, traded as high as $109.75 on Monday, its highest since Jan. 2.
U.S. crude traded 8 cents lower at $99.98. It closed above the $100-mark on Monday for the first time this year.
"If Yellen, as expected, gives a dovish testimony, it will give some assurance to oil markets," said Chee Tat Tan, investment analyst at Phillip Futures in Singapore. "The greenback would be likely to weaken further, which would help lift demand for crude oil."
The Fed has begun cutting its bond purchases by $10 billion a month as the U.S. economy showed signs of strength. The move marks perhaps its most difficult policy shift after five years of easy money that has provided support for risky assets such as commodities.
The dollar wallowed near a two-week low against a basket of major currencies early on Tuesday.
Further gains by Brent were capped due to expectations of an increase in Libyan crude supplies. The North African nation's current oil production is around 600,000 barrels per day (bpd) with the El Sharara oilfield producing 327,000 bpd and national exports now at 450,000 bpd, a spokesman for the National Oil Corporation (NOC) said.
"A stretch of increased export volumes from Libya and the prospect of a return to supply by Iran could create excess supply concerns for OPEC," analysts at ANZ said in a note.
U.S. oil hovered around a six-week high, supported by an expected drop in distillate inventories last week, in part due to continuing freezing weather across the country. That narrowed the price difference between the two contracts.
A survey of five analysts, taken ahead of weekly inventory reports from the American Petroleum Institute (API) and the U.S. Energy Information Administration (EIA), forecast distillate stocks, including heating oil and diesel fuel, fell 2.3 million barrels in the week to Feb. 7.
However, the possibility of milder weather next week curbed demand for heating oil in recent days, even as another snowstorm is expected in the U.S. Northeast this week.
"Prices can hold up for now, but when temperatures return to normal, oil may lose support and U.S. crude will again trade on its fundamentals," said Tan.
U.S. crude oil inventories were expected to have risen by 3 million barrels last week to more than 361 million barrels, the preliminary poll of analysts showed.
The API will release its data at 2130 GMT, while the EIA will publish its data on Wednesday at 1530 GMT.
Crude inventories could continue to rise as U.S. oil production from shale plays is expected to accelerate in February and March, the EIA said.
Shale oil production will rise by 63,000 barrels per day (bpd) in February and another 64,000 bpd in March, according to forecasts from the EIA issued on Monday.
That compares to a 53,000 bpd increase in January and a 49,000 bpd rise in December, months that typically experience slower activity due to winter weather conditions. (Reporting By Jacob Gronholt-Pedersen; Editing by Ed Davies, Sunil Nair and Simon Cameron-Moore)