CORRECTED-UPDATE 8-U.S. crude rises on small stock build, large draw at hub

Wed Feb 26, 2014 7:51pm EST

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(Corrects drawdown to build in fourth paragraph)

* U.S. crude discount to Brent narrows to less than $7/bbl

* U.S. crude stocks rise by meager 68,000 barrels - EIA

* U.S. gasoline falls 2.8 million barrels - EIA

* Crude stocks at Cushing draw for 4th week

By Elizabeth Dilts

NEW YORK, Feb 26 (Reuters) - U.S. oil futures rose on Wednesday after government data showed a surprisingly small build in crude inventories and another large drawdown at the American benchmark's delivery point.

Worries over China's growth kept Brent prices flat.

The discount between U.S. crude and the European benchmark shrank early on Wednesday to its lowest since early October in anticipation of the data, which showed the fourth consecutive weekly drop in inventories at the Cushing, Oklahoma delivery hub.

The U.S. Energy Information Administration said crude stocks rose overall by just 68,000 barrels last week, far less than the average build of 1.2 million barrels forecast, while stocks at Cushing fell 1.1 million barrels as TransCanada Corp's southern pipeline continued to drain oil to the Gulf Coast.

"The impact of the Keystone pipelines is on full display now and it's clearly supportive for prices," said John Kilduff a partner at Again Capital, LLC in New York.

Also supporting U.S. crude prices, U.S. gasoline inventories fell 2.8 million barrels, nearly three times traders' forecasts, data showed. Analysts attributed the surprise drop to lower refinery output and warmer weather coaxing drivers back on the roads.

The data drove RBOB gasoline prices for the front month March contract nearly 2 cents higher early in the session. But the contract, which expires Friday, gave back gains to settle flat, causing U.S. crude oil to pare gains too.

"The reason WTI ran out of steam is that RBOB ran out of steam," said Walter Zimmermann, chief technical analyst at United-ICAP in New Jersey.

U.S. crude oil settled 76 cents higher at $102.59 per barrel. It briefly touched a high of $102.90 after the EIA data was released.

Brent crude settled up a penny at $109.52 a barrel.

U.S. crude's discount to Brent CL-LCO1=R narrowed to as little as $6.72, the lowest price since Oct. 9, before widening back to settle at $6.93.

The spread has narrowed in recent weeks as storage has drained from Cushing, where prices were previously depressed, to refiners on the Gulf Coast. But analysts worry refiners' demand for U.S. crude could reach a limit.

"(It's unclear) that the Gulf Coast refineries really have strong enough demand to continue to pull that oil out of Cushing," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "If the spread drops down below $5, we'll see some of the strength let up."

Unrest in North African exporter Libya has cut supplies of oil since the middle of last year. More than 100 rockets fired in clashes between rival government-paid militia knocked out a power plant in southern Libya on Tuesday.

Oil markets were also watching the outlook for demand in China. The world No. 2 oil consumer's corporate debt has hit record levels and is likely to accelerate a wave of domestic restructuring and trigger more defaults as credit repayment problems rise.

Demand in the United States is also a major focus after data on Tuesday showed U.S. home price gains slowed in December, underscoring a loss of momentum in the housing recovery, while consumer confidence drifted lower this month.

However, the weakness in the housing sector may have been in part due to the bitter cold and severe snowstorms. (Additional reporting by Anna Louie Sussman in New York, David Sheppard, Peg Mackey and Shadi Bushra in London, and Manash Goswami in Singapore; Editing by Dale Hudson, David Evans, Chris Reese and Marguerita Choy)

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