UPDATE 9-US oil ends at 2-1/2-yr high on Mideast, gasoline

                                
 * Rockets from Gaza strike 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
  (Updates with details on trading volume)
                                
 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.
                                
 Brent crude fell, narrowing its premium to U.S. oil
futures, as part of a wave of profit-taking on the spread
between the two contracts which has jumped to record highs this
year due to bulging inventories in the U.S. Midwest.
                                
 U.S. trading activity was 45 percent below the 30-day
average -- the sixth day in a row it has traded below that
level -- as investors weighed the escalating tensions in the
Middle East and North Africa that have cut crude supplies and
the crisis in Japan that has muddled the demand outlook for the
world's No. 3 oil consumer.
                                
  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. Volumes reached only 476,156
contracts near the end of the trading day, on track for the
lowest level since Jan. 3.
                                
 In London, Brent May crude futures <LCOc1> pared losses and
settled down 15 cents at $115.55, after hitting the day's high
of $116.40, edging close to its 2-1/2 year high near $120
posted late in February. Brent trade volumes were also low,
nearing 285,000 lots late Wednesday, 46 percent lower than the
30-day average.
                                
 U.S. oil's gains narrowed its discount to Brent crude to
below $10 a barrel, after ending on Tuesday near $11.
[CL-LCO1=R]
                                
 "The rockets that hit Israel helped rally crude," said
Daniel Flynn, analyst at PFGBest Research in Chicago. "I have
seen some unwinding of the Brent/WTI spread, people taking
profits."
                                
 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 by
technicians as a sign a reversal lower is imminent.
                                
 U.S. gasoline futures <RBc1> settled 1.68 cents higher at
$3.0213 a gallon.
                                
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
                                
 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]
                                
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
                                
 U.S. GASOLINE INVENTORY DROP
                                
 U.S. oil was boosted by data from the U.S. Energy
Information Administration which confirmed a late Tuesday
report from the American Petroleum Institute showing a steep
drop in gasoline inventories for the week to March 18. [EIA/S]
                                
 Gasoline stockpiles in the first three weeks of March have
shown the steepest decline for the period on records stretching
back to 1990, as refiners shed stockpiles of winter grade
gasoline ahead of the shift to summer grades. [ID:nN23263825]
                                
 Refinery runs rose by 0.7 percentage points, however, while
crude inventories showed a stronger-than-expected build.
                                
 MIDEAST UNREST
                                
 While traders say the market has already priced in an
extended loss of Libyan crude due to violence in the OPEC
nation, markets are eyeing unrest throughout the Middle East
for signs of potential disruptions from other big oil
producers.
                                
 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. [ID:nLDE72M1WV]
                                
 In top OPEC exporter Saudi Arabia, authorities arrested 100
Shi'ite protesters in demonstrations in the east of the country
last week, a Saudi human rights group said, while in
neighboring Bahrain, 30 people were wounded in the state's
crackdown against demonstrators demanding democratic reforms.
[ID:nLDE72M2HG] [ID:nLDE72M0LD]
                                
 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]
 (Additional reporting by Robert Gibbons and Matthew Robinson
in New York; Ikuko Kurahone in London and Alejandro Barbajosa
in Singapore; editing by Marguerita Choy and Jim Marshall)