Brent crude rose above $111 a barrel in choppy trading on Monday as Saudi Arabia said it sees robust demand from Asia, while U.S. crude prices fell as a pipeline leak in Arkansas threatened to increase the glut of oil in the U.S. Midwest.
Exxon Mobil's Pegasus pipeline, which can carry more than 90,000 barrels per day of Canadian oil from the U.S. Midwest to the Gulf Coast, has been shut since rupturing on Friday.
The shut pipeline compounds expectations for a rise in crude oil stocks of 2.3 million barrels in the United States last week, a provisional poll of analysts and traders by Reuters showed.
"It's kind of a landlocked situation," said Thomas Mooney, president of Southeast Energy, Inc.
"They're making more crude in the Midwest than they can use."
Rising U.S. production, imports from Canada, and limited pipeline flows from the Midwest to the Gulf Coast have weighed on U.S. crude prices relative to seaborne benchmark Brent, creating a large price divergence between the two main oil contracts.
After dipping in early trade, Brent crude for delivery in May recovered to rise $1.06 to settle at $111.08 a barrel, closing above the 200-day moving average of $110.06, a key technical indicator watched by traders.
U.S. crude futures settled down $0.16 a barrel at $97.07.
The spread between Brent and U.S. crude contract <CL-LCO1=R> moved back above $14 a barrel after slipping to $12.32 in early trade, the narrowest spread since July.
With Britain and much of Europe still on Easter holiday on Monday, trading volumes were lower, contributing to volatile trading.
Brent crude trading volume was 60 percent lower than the 30-day average, while U.S. crude trading volume was 23 percent below the 30-day average.
Demand for Saudi crude is likely to rise over the next few months, Saudi oil minister Ali Al-Naimi said on Monday, in a sign that the world's largest oil exporter sees a recovery in its biggest export market, Asia.
Saudi Arabia, OPEC's leading producer and holder of the world's only significant spare output capacity, cut its output by around 700,000 bpd over the last two months of 2012, helping drive a rise in crude prices from early December to February.
Disappointing economic data from Asia and the United States kept Brent's price gains in check during Monday's session.
China's official purchasing managers index (PMI) came in at 50.9, the highest in 11 months, but economists expected bigger recovery from February's five-month low.
"The data came in below market expectations, which could indicate that oil demand growth may not expand quite as quickly," said Carl Larry, president of Oil Outlooks and Opinion, based in Houston.
"But China's still growing, and that continues to be an underlying support factor long term for the market. Whether they are at 6 percent or 7 percent, they are growing."
Data showing the pace of expansion in the U.S. manufacturing sector slowed in March and weaker equities on Wall Street also weighed on U.S. oil prices on Monday.
This week will see several key economic reports, including euro zone unemployment data due on Tuesday and U.S. March nonfarm payrolls data due on Friday.
Oil investors are also monitoring upcoming negotiations between Iran and the U.N Security Council members, plus Germany, over Tehran's disputed nuclear program.
The United States and European Union have sanctioned Iran's oil exports in a bid to force concessions from Tehran. (Additional reporting by David Sheppard in New York, Dmitry Zhdannikov in London and Luke Pachymuthu in Singapore; Editing by Peter Galloway)