UPDATE 6-Oil pares Spain-inspired gains, products rally

                                
 * Spanish bond auction results lift Europe stocks, Brent
                                
 * But U.S. jobless claims, manufacturing data shave gains
                                
 * Brent/WTI turns negative, despite mid-week Cushing draw
                                
 * Coming up: CFTC trader positions on Friday
                                
 (Recasts, updates prices, market activity, moves dateline
from previous LONDON)
                                
 By Robert Gibbons
                                
 NEW YORK, June 17 (Reuters) - Brent crude oil pared gains
and prompt U.S. futures fell on Thursday after disappointing
U.S. economic data undermined earlier optimism tied to a
Spanish bond auction.
                                
 U.S. gasoline and heating oil prices rallied, however,
aided by signs of improving underlying demand and refinery
glitches, lifting product crack spreads by more than $1 a
barrel to their highest in about a month.
                                
 Crude prices weakened after U.S. stocks fell [.N] on two
separate reports showing higher weekly initial unemployment
claims and plummeting mid-Atlantic factory activity growth,
stoking fears that growth could be slowing. [ID:nN17222124]
                                
 After initially trading as much as $1 higher, London ICE
Brent crude for August <LCOc1> rose 3 cents to $78.17 by 12:45
p.m. EDT (1645 GMT).
                                
 U.S. futures <CLc1>, being whipsawed by July options expiry
and still high inventories at the Cushing, Oklahoma, delivery
hub, fell $1.37, or 1.76 percent, to $76.30 a barrel, although
longer-dated crude prices for 2011 were only mildly negative.
                                
 "A strong bond auction by Spain is a strong sign that the
market is more relaxed about European financial problems, and
as European financial fears relax, Brent crude oil gains in
strength," JP Morgan analysts said in a research note.
                                
 Spain sold just under its target amount of 3.5 billion
euros ($4.29 billion) of 10-year and 30-year government bonds
on Thursday. Analysts said the sale went well after the bonds
cheapened considerably ahead of the sale. [ID:nMDT009123]
                                
 It followed a report, denied by the European Union and the
International Monetary Fund, that they and the U.S. Treasury
were drawing up a safety net for Spain.
                                
 The euro rose to a three-week high against the U.S. dollar.
[FRX/]
                                
 JP Morgan noted Brent's price rise was "additionally
positive" as it came despite a strike by Norwegian oil workers
being averted after they landed a wage deal to maintain output
at three North Sea oil and gas fields. [ID:nLDE65G01T]
                                
 Initial claims for state unemployment benefits increased
12,000 to a seasonally adjusted 472,000 in the week ended June
12, the Labor Department said on Thursday.
                                
 Factory activity growth plummeted in the U.S. Mid-Atlantic
region in June, raising concerns that an anemic U.S. economic
recovery is faltering. The Philadelphia Federal Reserve Bank
said its business activity index dropped to 8.0 in June from
May's 21.4. [ID:nN17165505]
                                
 MIXED DAY
                                
 Amid a very mixed performance across the oil complex,
refined fuel prices led gains on refinery glitches, lower
capacity utilization and recent signs of improved demand.
                                
 Valero Energy Corp <VLO.N> said on Thursday a
gasoline-making unit at its McKee, Texas, refinery, a key
recipient of Cushing crude, may be down until mid-July after
the unit shut Wednesday for unplanned repairs. [ID:nN17262172]
                                
 The front end of the U.S. crude curve fell sharply, causing
the Brent/WTI spread to widen and product cracks to rally,
despite a report showing that record Cushing stockpiles that
have pressured prompt prices may finally be easing.
                                
 "The front WTI switch has stretched out toward $1.50 a
barrel and could expand a bit further given near record crude
supply at Cushing," said Jim Ritterbusch, president at
Ritterbusch & Associates in Galena, Illinois.
                                
 Cushing stocks rose 200,000 barrels to 37.6 million barrels
in the week to June 11, according to the U.S. Energy
Information Administration's report on Wednesday, helping keep
front-month July crude at a deficit to August <CL-1=R>.
                                
 But industry data provider Genscape on Thursday said
Cushing stocks fell 709,048 barrels to 39.3 million barrels in
the week to June 15, dropping from a record
high.[ID:nN17236148]
 (Additional reporting by Alejandro Barbajosa in Singapore and
Ikuko Kurahone in London; Editing by Jonathan Leff and Sofina
Mirza-Reid)