UPDATE 10-U.S. oil drops on pipeline outage, contract expiration
* Libyan unrest supports Brent crude oil
* Market awaits Fed meeting minutes on Wednesday
* Coming up: API inventory data at 4:30 p.m. EDT
* Coming up: EIA oil data on Wednesday (Adds details, updates to settlement prices.)
By Jeanine Prezioso
NEW YORK, Aug 20 (Reuters) - U.S. crude oil futures fell sharply on Tuesday as traders sold to close out positions ahead of the front-month contract's expiration and in reaction to news the Seaway pipeline had shut down halting shipments from Oklahoma to the Gulf Coast.
Seaway carries crude oil from Cushing, Oklahoma, the delivery point for the futures' benchmark West Texas Intermediate (WTI) crude, to refineries on the Gulf Coast.
The drop in U.S. crude oil swelled its discount to Brent to its largest since June.
U.S. crude oil futures for September delivery, expired $2.14 per barrel lower, or down 2 percent, at $104.96, their largest one-day percentage loss in two months.
October U.S. oil futures ended the session $1.75 per barrel lower at $105.11. The spread between October and November futures prices narrowed to its smallest point in two months at 51 cents.
Brent's premium to WTI oil futures, or the Brent-WTI spread, CL-LCO1=R passed through its 50-day moving average for the first time in five months. It settled at $5.04 per barrel, the widest since the end of June, helped by Brent's higher close.
"We have a huge amount of net length and this is just rolling contracts and profit taking," said Rich Ilczyszyn, chief market strategist and founder of iitrader.com LLC in Chicago.
"We've got a lot of data coming out tomorrow. Whether or not it's a downward trend we'll have to wait until tomorrow to see."
In the meantime, Brent crude oil futures rose on continued concerns about potential supply disruptions in the Middle East, reversing losses caused by worries about the U.S. Federal Reserve's monetary easing policy.
"We were down early on tapering concerns, and what seemed to turn the momentum around were concerns about clashes in Libya," said Phil Flynn, an analyst with Price Futures Group in Chicago.
Brent crude oil futures for October delivery settled 25 cents higher at $110.15 per barrel, after trading as low as $108.61 earlier in the session.
The Libyan government asked tankers to leave the port of Es Sider, the country's largest, after striking workers at several major oil terminals allegedly attempted to sell crude themselves, bypassing the official force majeure shutdown.
The head of Libya's Petroleum Facilities Guard said that striking workers at Zuetini, the country's third-largest oil port, had fired on civilians and injured at least one person. Independent confirmation of the shooting was not immediately available.
Worries that the situation in Libya would deteriorate further helped support Brent crude prices, reversing earlier losses. About half of Libya's more than 1.2-million-barrel-per-day export capacity remains shut down due to civil unrest, industry sources said.
Traders took profits in both Brent and U.S. oil earlier in the session fearing the U.S. government would lay out plans to pull back its monetary easing program, which could ultimately dampen demand for oil in the world's largest oil consumer.
The Fed will release minutes of its latest policy meeting on Wednesday. The minutes are largely expected to give clues on when the central bank plans to taper its monthly $85 billion in asset purchases that have supported commodities in recent years.
The market is also waiting on other data. U.S. commercial crude inventories likely fell last week by 1.4 million barrels, an initial poll of Reuters analysts showed ahead of the release of weekly data.
Industry group API is set to release its stockpile report on Tuesday at 4:30 p.m. EDT (2030 GMT). The U.S. Energy Information Administration issues its data on Wednesday at 10:30 a.m. EDT (1430 GMT). (Additional reporting by Anna Sussman and Nicolas Medina Mora Perez in New York, Ron Bousso in London and Jessica Jaganathan in Singapore; editing by Jason Neely, David Cowell, Chizu Nomiyama and Bob Burgdorfer)
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