Oil Eyes $100 Mark as Mideast Worries Mount

U.S. crude jumped on Tuesday, hitting a nine-month high above $99 a barrel, as turmoil in the Middle East unsettled investors while signs of tightening supply in the U.S. Midwest strengthened prompt U.S. crude prices relative to other contracts.

The spread between European Brent and U.S. WTI crude for September narrowed to near $4 a barrel, the lowest since early 2011, as some traders rushed to cover short bets. Goldman Sachs closed its trade recommendation after the spread collapsed from over $23 in February to its target of $5.

U.S. inter-month spreads stretched to the highest in years, with the Sept/Oct WTI spread <CLU3-V3> jumping to a record high of $1.24, up from just 34 cents a barrel last week.

The dramatic strengthening at the front end of the U.S. crude oil curve has been tied to the restart last month of BP's revamped 413,000 barrel-per-day Whiting refinery, which is expected to help absorb more Canadian crude oil supplies that might otherwise fill up tanks at Cushing, Oklahoma, the delivery point for the U.S. oil futures contract.

"It reflects expectations that (supplies) are going to be much tighter in the third quarter," said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

"Refinery runs are very high, and they've got room to run higher."

Oil also got a boost from turmoil in the strife-ridden Middle East, where Libyan oil output has fallen by a third after protesters shut several oilfields and anti-government demonstrations in Egypt have raised concerns about the stability of the whole region.

Brent crude futures for August delivery were up 58 cents at $103.58 a barrel by 12:03 p.m. EDT (1603 GMT) after rising 0.8 percent the previous day.

U.S. crude futures for August were 96 cents higher at $98.95 per barrel after earlier hitting $99.17, its highest since Sept. 2012.

Traders and brokers also said that market players who were short September versus October were getting squeezed.

"Right now there are a large number of market participants who play the short spread trade getting squeezed on September WTI. This move in Brent-WTI caught a lot of people unaware," said a hedge fund manager active in the energy space.

New pipeline and rail capacity has come online in recent months to alleviate the glut of crude at Cushing that has built up as more production from U.S. shale and Canadian oil sands comes into the region, and many players expect drawdowns at the oil hub to grow, supporting U.S. oil prices relative to Brent.

"Over 2 million barrels per day (bpd) of global refinery capacity will return by late July on top of the 2.5 million bpd that has returned over the past four weeks, providing ample opportunity for runs to rise," Morgan Stanley said in a note.

Prices were also supported by data on Monday from the Institute for Supply Management that showed U.S. manufacturing activity grew in June and a bullish U.S. equity market.

(Additional reporting by Robert Campbell in New York, Simon Falush in London and Florence Tan in Singapore; Editing by Jonathan Leff and David Gregorio)