UPDATE 8-US oil settles at 2-1/2 year high on Mideast, gasoline

                                
 * Rocket from Gaza strikes deep in Israel
                                
 * Saudi Arabia arrests 100 protesters
                                
 * Unrest continues in Yemen, Bahrain
                                
 * U.S. gasoline stocks in biggest seasonal fall-EIA
                                
 * Coming up: U.S. jobless claims data on Thursday
  (Recasts, updates prices and market activity, adds new
by-line)
                                
 By Gene Ramos
                                
 NEW YORK, March 23 (Reuters) - U.S. crude ended at a 2-1/2
year high on Wednesday as Palestinian rocket strikes on Israel
escalated Middle East geopolitical risks and U.S. gasoline
inventories posted the biggest seasonal decline on record.
                                
 U.S. crude futures for May delivery <CLc1> settled at
$105.75 a barrel, gaining 78 cents and marking the highest
close since September 2008. <CLc1>
                                
 In London, Brent May crude futures <LCOc1> pared losses and
settled down 15 cents at $115.55, after having hit the day's
high of $116.40, edging close to its 2-1/2 year high hit late
in February.
                                
 That narrowed Brent crude's premium against its U.S.
counterpart to below $10 a barrel, after ending on Tuesday near
$11. [CL-LCO1=R]
                                
 Total U.S. crude trading volume was 451,899 lots, and
Brent's volume was 279,755 lots -- both nearly 50 percent below
their 30-day average with more than two hours of trading left
on the day.
                                
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
                                
 Graphic - record March U.S. gasoline drawdowns:
                                
 http://r.reuters.com/fys68r
                                
 Graphic - U.S. crude futures approach overbought levels:
                                
 http://link.reuters.com/zut68r
                                
 Reuters Insider: Christopher Henwood on EIA data:
                                
 http://link.reuters.com/zys68r
                                
 More on Middle East unrest:    [nTOPMEAST]  [nLDE71O2CH]
                                
 Libya graphics            http://link.reuters.com/neg68r
                                
 Oil technicals                                [TECH/C-O]
                                
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
                                
 As U.S. crude approached its 2011 high of $106.95 a barrel,
it was showing signs of being overbought on a key technical
indicator. It was threatening to breach the 70 level on the
14-day relative strength index, which is usually interpreted as
a sign a reversal lower is imminent.
                                
 MIDEAST VIOLENCE, UNREST CONTINUES
                                
 Palestinian rockets fired from Gaza slammed into two cities
deep in Israel while a deadly suitcase bomb exploded in
Jerusalem, reigniting violence between Israelis and
Palestinians after nearly two years of relative calm and adding
a new dimension to anxieties besetting the Middle East.
[ID:nLDE72M1WV]
                                
 "The rockets that hit Israel helped rally crude," said
Daniel Flynn, analyst at PFGBest Research in Chicago.
                                
 But the drop in Brent crude was attributable to "some
unwinding of the Brent/WTI spread (and) people taking profits,"
Flynn added.
                                
 Already wracked by ongoing Allied air strikes against
targets in Libya and nervously watching unrest in Yemen and
Bahrain, the oil market has risen close to recent milestones as
worries festered about potential supply disruptions.
                                
 Western warplanes silenced Muammar Gaddafi's artillery and
tanks besieging the rebel-held town of Misrata, while in Sanaa
Yemen's president offered to step down by the end of the year
in a bid to appease protesters seeking his ouster.
[ID:nLDE72M003] [ID:nLDE72M17A]
                                
 Saudi authorities arrested 100 Shi'ite protesters in
demonstrations in the east of the country last week, a Saudi
human rights group said. [ID:nLDE72M0LD]
                                
 And in Bahrain, 30 people were wounded in the state's
crackdown against demonstrators demanding democratic reforms.
[ID:nLDE72M2HG]
                                
 U.S. GASOLINE INVENTORIES DOWN SHARPLY
                                
 U.S. government data showed a 5.32 million barrel drop in
gasoline inventories in the week to March 18, surpassing an
analyst forecast of a 1.8 million barrel drop. [EIA/S]
                                
 Gasoline stocks declined even though refiners boosted
utilization rates by 0.7 percentage point. But the capacity use
increase did not prevent a rise in crude stocks that was bigger
than expected, and distillate stocks also posted a gain.
                                
The gasoline stocks drawdown in the first three weeks in
March was the biggest decline for that period since 1990, when
the U.S. Energy Information Administration (EIA) started its
weekly inventory report. [ID:nN23255888]
                                
Gasoline demand over the past four weeks was 1.2 percent
higher than a year earlier, the EIA said.
 (Additional reporting by Robert Gibbons in New York; Ikuko
Kurahone in London and Alejandro Barbajosa in Singapore;
editing by Marguerita Choy and Jim marshall)