* API oil inventory data shows decline in crude oil stocks
* Western powers, Iran may start final talks in Feb
* Rise in Libyan supply weighs on Brent
* Investors buy ahead of February Brent expiry on Thursday (Adds API data, paragraphs 10, 11)
By Elizabeth Dilts
NEW YORK, Jan 14 (Reuters) - U.S. oil prices rose on Tuesday as traders squared positions amid some signs of strength in the U.S. economy, while Brent fell in choppy trading, pressured by incremental increases in Libyan oil supply and expectations that Iranian crude will return to market.
The rise in U.S. oil narrowed its discount to Brent by more than $1 from Monday’s settlement.
Traders bought contracts to square futures and options positions ahead of the U.S. February oil contract’s expiry on Jan. 21. There will be no floor trading on the New York Mercantile Exchange and no settlement will occur on Monday, Jan. 20, due to the Martin Luther King Jr. holiday.
“People will get out of the contract by Thursday or Friday,” said Bill Baruch, senior market strategist at iitrader.com in Chicago.
Upbeat retail sales data helped support U.S. oil futures.
The February Brent crude contract, which expires on Thursday, settled down 36 cents at $106.39, after seesawing in a range of more than a dollar, reaching an early morning high of $107.14.
U.S. crude settled up 79 cents at $92.59, a day after dropping 92 cents.
“This is a consolidation move, the market is trying to hold after its slide,” said Gene McGillian, energy analyst with Tradition Energy in Stamford, Connecticut.
Brent’s premium to U.S. oil CL-LCO1=R narrowed from a high of $15.51 on Monday. The spread breached the 10-day moving average of $13.75, but settled slightly wider at $13.80.
Oil prices were little changed after data from the American Petroleum Institute showed that weekly crude stocks fell by 4.1 million barrels with a nominal build at the benchmark delivery point in Cushing, Oklahoma. Gasoline stocks rose by 5.4 million barrels and distillates fell by 1.7 million barrels, the API data showed.
Analysts in a Reuters poll expected a decrease in oil stocks for the seventh straight week, by an average of 600,000 barrels, while stockpiles of distillate and gasoline were expected to have dramatically increased for a second week in a row.
The U.S. Energy Information Administration is expected to release its data at 10:30 a.m EST (1530 GMT) on Wednesday.
Major powers and Iran have moved a step closer to resolving a long standoff over Tehran’s nuclear ambitions after endorsing a deal that will come into force on Jan. 20.
The parties are likely to start talks on a final settlement in February, a diplomatic source said on Monday.
A resolution of the issue could lead to the lifting of Western sanctions on the OPEC producer’s oil exports, increasing global supply.
Libya’s production has also risen to at least 600,000 barrels per day (bpd), with output at the El Sharara field back up to more than 300,000 bpd, its oil minister said earlier in the week. Wrecked by months of domestic protests, the OPEC producer’s output is still below the 1.2 million bpd it was turning out in July.
Britain’s biggest oilfield, Buzzard, where an outage last week temporarily boosted Brent, is expected to return to normal output in coming days, its operator Nexen said on Monday. (Additional reporting by Jeanine Prezioso in New York, Peg Mackey in London and Florence Tan in Singapore; editing by David Evans, Keiron Henderson, David Gregorio, Meredith Mazzilli and Chizu Nomiyama)