* Brent premium to U.S. crude widens, trade volumes heavy
* Not immediately clear when full Seaway rates will be restored
* U.S. crude, distillate stocks rise, gasoline falls - API
* Coming up: EIA oil data 11 a.m. EST Thursday (Updates with API data paragraphs 11-15)
NEW YORK, Jan 23 U.S. crude futures dropped 1.5 percent o n W ednesday in heavy trading after a key oil pipeline reduced the volume flowing through it, raising concerns inventories at the Midwest delivery point for the contract might swell further.
As prices for international Brent crude held in positive territory following supportive economic data, U.S. crude plunged in afternoon trade after shippers received notification that the newly expanded 400,000 barrel per day (bpd) Seaway pipeline had cut rates to 175,000 bpd. It was not immediately clear when full rates would be restored.
The line, which was restarted earlier this month after the expansion was completed, ships crude from the Cushing, Oklahoma delivery point for the New York Mercantile Exchange's oil contract to the U.S. Gulf Coast. The reduced throughput was expected to increase inventories at the hub, which had already hit record levels earlier in the month.
Brent's premium to U.S. West Texas Intermediate crude widened to near $17.50 a barrel - the highest level since Jan. 15 - following the news. The spread had dipped below $15 a barrel last week following Seaway's start-up.
"Stocks at Cushing are already at record levels and traders were betting that this line would help them draw, and narrow, the Brent-WTI spread," said Andy Lebow, vice president at Jefferies Bache in New York.
"This could be very bearish WTI," he added.
Front-month U.S. crude oil futures settled down $1.45 to $95.23 a barrel, snapping four straight sessions of gains which had pushed the contract above a reading of 70 on the 14-day relative strength index, a level typically seen as an indication a commodity has been overbought.
Trading volumes were strong, with U.S. crude trade at nearly double the levels seen over the previous 30 days. Brent crude volumes were up 60 percent over that level.
Brent crude oil prices traded up 38 cents to settle at $112.80 a barrel.
Brent found early support from data showing British unemployment fell for the 10th consecutive quarter at the end of last year and that jobless claims hit their lowest level since mid-2011 in December.
U.S. OIL INVENTORIES
U.S. crude stocks rose 3.2 million barrels last week, the American Petroleum Institute (API) said in a report on Wednesday.
Crude stocks at Cushing fell 463,000 barrels, according to the API.
Gasoline stocks fell 1.6 million barrels and distillate stocks rose 1.3 million barrels, the API said.
U.S. crude stocks had been expected to be up 1.8 million barrels, according to a Reuters survey of analysts ahead of weekly inventory reports.
Distillate stocks were expected to be up 400,000 barrels and gasoline stocks up 1.5 million barrels.
The U.S. Energy Information Administration's inventory report follows at 11 a.m. EST on Thursday, delayed one day by the U.S. holiday on Monday. (Reporting by Matthew Robinson, Robert Gibbons and Gabriel Debenedetti in New York, Ron Bousso and Simon Falush in London and Florence Tan and Seng Li Peng in Singapore; editing by Peter Galloway, Gunna Dickson, Gary Crosse and Alden Bentley)