Oil prices fell in heavy trading on Friday, pulled lower by a drop in gasoline on expectations that a large number of European cargoes could hit US shores, while a key spread narrowed sharply on news of the start-up of a major Midwest pipeline.

RBOB gasoline futures dropped 2 per cent, the biggest daily decline since early November, amid talk of large volumes of European gasoline headed to the New York Harbor, delivery point for U.S. oil product futures, as fuel demand in West Africa declined seasonally.

Up to 21 oil product tankers have been booked from Europe to transatlantic destinations since the start of January, according to Reuters ship fixtures data. Most of the vessels have capacity to carry 250,000 barrels to 300,000 barrels.

The drop came a day after talk that high volumes of European gasoil were being offered into the Harbor had dragged on U.S. heating oil futures.

Losses in international benchmark Brent outpaced those for US crude benchmark West Texas Intermediate, following news of the start-up of the expanded Seaway pipeline. The pipeline aims to ease the glut of crude in the US Midwest, especially at the Cushing, Oklahoma delivery point for the US oil futures contract, that has weighed on US prices.

The pipeline expansion allows Seaway to deliver 400,000 barrels per day (bpd) of crude from Cushing to the Gulf Coast refining hub, where crude fetches a higher price. There have been bottlenecks at Cushing caused by rising volumes of US and Canadian crude.

Brent's premium to WTI narrowed to below $17 a barrel for the first time since September 20 on word of the pipeline restart.

Brent February crude settled down $1.25 at $110.64 a barrel, retreating below its 100-day moving average of $111.05. Brent's $109.60 session low was below the 50-day moving average at $109.73.

US February crude fell 26 cents to settle at $93.56 a barrel, having fallen as low as $92.65.

Brent trading volumes outpaced activity in the US contract, up nearly 50 per cent over the 30-day moving average. US crude on the New York Mercantile Exchange traded about 31 percent above its 30-day moving average.

Crude futures retreated early on Friday "after the latest inflation figures from China created uncertainty over the amount of stimulus the government might now be willing to inject into the economy," Addison Armstrong, senior director at Tradition Energy, said in a research note.

China's annual consumer inflation rate quickened to a seven-month high of 2.5 percent in December, above expectations, on rising food prices. U.S. stocks edged lower after Wells Fargo & Co, the first major bank to kick off fourth-quarter earnings season, reported a decline in net interest margin despite a record profit.

After crude futures received support on Thursday from news that top oil exporter Saudi Arabia had cut production in the last two months of 2012, those cuts helped pressure crude futures on Friday because they indicated a lack of demand and an effort to defend prices.

"Although the sharp Saudi production cuts last month toward 9 million barrels a day were widely mentioned as a bullish consideration, we viewed the reduction as further evidence of global demand weakening and consequently deserving of a bearish checkmark," said a research note from Jefferies Bache.

Opec's top producer cut oil production by 700,000 barrels per day (bpd) to 9 million bpd during the last two months of 2012, according to a source familiar with Saudi policy.

Major customers for Saudi crude said the cuts were driven by lower demand.-Reuters