UPDATE 8-U.S. crude oil jumps ahead of expiry, inventory drop supports
* U.S. September crude contract volatile ahead of expiration
* U.S. crude stocks drop 4.5 million barrels-EIA
* EIA says U.S. gasoline stocks up, distillates down (Updates prices to settlement, adds comment)
NEW YORK, Aug 20 (Reuters) - U.S. crude oil rose in choppy trading on Wednesday ahead of the September contract's expiration and after government data showed crude stocks in the United States fell sharply last week.
Front-month October Brent and U.S. October crude saw more modest gains, as Brent recovered after falling to a 14-month low on Tuesday.
U.S. crude stocks slid by 4.5 million barrels last week, the U.S. Energy Information Administration (EIA) said, more than analysts had expected. Stocks in Cushing, Oklahoma - the delivery point for the U.S. crude contract - rose by 1.76 million barrels.
Gasoline stocks rose 585,000 barrels against expectations for a drop while distillate stocks fell 960,000 barrels, slightly more than forecast.
Brent crude for October delivery rose 72 cents to settle at $102.28 a barrel. The contract touched $101.07 on Tuesday, its lowest since June 26, 2013.
The expiring U.S. September crude contract rose $1.59 to settle at $96.07. The more actively-traded October crude rose 59 cents to settle at $93.45, with its discount to Brent CL-LCO1=R above $9 intraday, the widest spread since June.
U.S. crude futures, also known by their West Texas Intermediate benchmark or WTI, have been pressured by growing supplies of light-sweet oil from booming North American output, hitting a seven-month low of $94.26 on Tuesday.
The sharp drop in crude inventories showed that refineries are taking advantage of an arbitrage in diesel exports from the Gulf Coast to ramp up their refinery activity, said Stephen Schork, editor of The Schork Report in Villanova, Pennsylvania.
"Down in the Gulf Coast the refineries are running the heck out of it. They're probably pushing their scheduled maintenance back to maximize the current margins," he said.
September WTI rose by nearly $2 a barrel intraday on Wednesday as traders bought back short positions ahead of the contract's expiration.
September's premium to the October contract reached $3.12 on Wednesday, the largest price difference between the front and second month contracts CLc1-CLc2 since 2009.
"There has been some outsized volatility over the past several sessions," said John Kilduff, partner at Again Capital LLC in New York, noting that traders were closely watching pipeline flows into and out of Cushing.
He added that the September contract was "starved for liquidity," making it easy to push around.
U.S. September RBOB gasoline futures were up only 0.60 cent at $2.7014, having retreated from its $2.7349 a gallon peak notched ahead of the EIA data.
ATLANTIC BASIN GLUT
Brent firmed as traders said a 12 percent slide since June might be overdone. Brent had fallen by more than $13 a barrel in two months as increased output of light sweet crude created a glut in the Atlantic Basin.
Fears that violence in Iraq would slash output have not materialized and Libya's output has also risen despite fighting between rival militias.
"The returning oil supply from Libya is flooding a market that is already amply supplied," said Carsten Fritsch, a commodity analyst at Commerzbank in Frankfurt.
"There is thus growing pressure on the other OPEC producers to scale back their supply so that the oversupply does not become excessive," he said. (Additional reporting by Robert Gibbons in New York, David Sheppard in London and Manolo Serapio Jr. in Singapore; editing by David Clarke, G Crosse, David Evans and Andrew Hay)
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