* US crude stocks rise sharply-API
* Exxon Midwest pipeline spill sparks spread trading
* Economic outlook for U.S./Europe fuels demand worries (Updates with API data, paragraphs 12, 13)
By Anna Louie Sussman
NEW YORK, April 2 (Reuters) - Brent crude oil settled lower and U.S. crude settled slightly higher on Tuesday as traders weighed concerns about demand and the possibility of a prolonged pipeline outage in the U.S. Midwest.
Brent crude oil rose early, then reversed to fall as much as $1 a barrel, before settling down 39 cents a barrel at $110.69. The session low of $110 a barrel was below the 200-day moving average of $110.17.
U.S. crude fell in the morning, then rebounded to settle up 12 cents at $97.19.
The Brent-U.S. crude spread CL-LCO1=R narrowed in choppy trading to settle at $13.50 a barrel, after widening to as much as $14.66 during the session.
U.S. crude slipped in post-settlement trading, and was down 22 cents at $96.85 as of 4:52 p.m. in New York (2052 GMT).
Uncertainty surrounding the impact of the ruptured Exxon Mobil Pegasus pipeline in the U.S. Midwest has kept U.S. light sweet crude prices volatile. The premium of Brent to U.S. light sweet crude ended at $13.50 CL-LCO1=R after the spread between the two widened to as much as $14.66.
“Clearly the big factor is this Pegasus pipeline, and I don’t think anyone has a firm handle on how long it’s down for,” said Andy Lebow, vice president at Jefferies Bache in New York.
“The guesses I’ve seen have been from five days to 10 days to two weeks. The longer it’s down for, the more it will support Brent at the expense of U.S. crude.”
Traders said the pipeline problem is likely to keep crude oil bottled up in the Midwest, depressing prices, as stockpiles of oil should build up near the delivery point of the U.S. crude oil benchmark contract in Cushing, Oklahoma.
Exxon said it was developing a plan to excavate, remove and replace the ruptured portion of the Pegasus Pipeline, shut on Friday after a leak released thousands of barrels of crude into a housing development in Arkansas.
The company had not yet provided an estimate of when it might reopen the nearly 65-year-old pipeline, which can carry more than 90,000 barrels per day (bpd) of crude to Texas from Illinois.
Late on Tuesday, the American Petroleum Institute released data showing U.S. crude oil stocks rose 4.7 million barrels for the week ended March 29, higher than the 2.2 million predicted by a Reuters analyst poll.
At Cushing, stocks were down 287,000 barrels. But traders said they may well rise in next week’s data after the Pegasus pipeline spill. Gasoline stocks decreased 5 million barrels while distillate stocks fell 1.85 million barrels, both larger declines than anticipated.
The U.S. government’s Energy Information Administration (EIA) releases its more closely watched report at 10:30 am EDT (1430 GMT) on Wednesday.
U.S. gasoline futures posted the biggest percentage drop in the oil futures complex, falling more than 2 percent to below the 50-day moving average of $3.0477 a gallon, a technical level closely monitored by chart watching traders and analysts.
“RBOB got below the 50-day moving average and that triggered sell stops and sent it down more,” said Mark Waggoner, president at Excel Futures Inc in Portland, Oregon.
Gasoline futures settled down nearly 2 percent, or 6 cents, at $3.0408 a gallon.
While gasoline futures fell, U.S. heating oil rose more than a penny.
A stronger dollar also put pressure on dollar-denominated oil prices, while the euro weakened against the dollar on euro zone data showing the region was well into economic contraction last month.
British manufacturing also remained in contraction, and European Union (EU) data showed unemployment in February was steady at 12 percent.
The gloomy data from Europe followed Monday’s report that U.S. factory activity grew at its slowest rate in three months in March, indicating a loss of momentum at the end of the first quarter.
Investors await Friday’s closely watched U.S. March nonfarm payrolls report for an indication if the headwinds from a tighter fiscal policy, the sequestration or automatic spending cuts, have slowed the economy of the No. 1 global oil consumer. (Additional reporting by Robert Gibbons in New York, Peg Mackey in London and Luke Pachymuthu in Singapore; Editing by Andrew Hay, Bob Burgdorfer and Grant McCool)