UPDATE 2-Expanded Seaway line pumps surplus oil from US Midwest

* Project could have major impact on global oil prices * U.S. benchmark WTI crude narrows its discount to Brent * 2013 to see 1 million bpd pipeline reconfiguration-Analyst * Seaway seen more than doubling current capacity next year (New Throughout, adds detail, price spread reaction, comment) By Joshua Schneyer Jan 11 (Reuters) - The Seaway oil pipeline, newly expanded to carry up to 400,000 barrels per day (bpd), began pumping crude on Friday from an over-supplied U.S. Midwest region to the Gulf Coast, in a start-up that could heavily impact global oil prices. The 500-mile (805 km) pipeline, a joint venture between Enterprise Product Partners and Enbridge Inc, had been shut since Jan. 2 to prepare for shipping higher volumes from Cushing, Oklahoma, to Freeport, Texas. Its earlier capacity was 150,000 bpd. Seaway re-opened on Friday, its owners said in a statement. Enbridge confirmed that crude was flowing through the line on Friday afternoon, although it didn't say at what volume. An Enterprise spokesman declined to comment on current volumes of crude flowing down the line. Seaway's expansion has been widely anticipated by oil traders. It is among the first major projects in a trend of reconfiguration for U.S. pipeline networks that could alleviate distortions in global oil markets caused by depressed oil prices at the landlocked U.S. futures delivery hub of Cushing, Oklahoma. Seaway's owners plan to expand the line further, to 850,000 bpd, by early 2014. The completion of Seaway's most recent expansion had an immediate impact in oil markets on Friday. The price spread between U.S. crude futures, or West Texas Intermediate delivered at Cushing, and London-traded Brent crude futures , narrowed to less than $17 a barrel for the first time since September. <CL-LCO1=R> As recently as November, the spread had ballooned to $26 a barrel, a symptom of ample oil supplies in the U.S. Midcontinent delivery hub, and sparse pipeline capacity there to carry the oil to other regions, such as the Gulf Coast, which is home to around half of U.S. refining capacity. Differentials for cash crude grades along the U.S. Gulf Coast also weakened against WTI on Friday, physical crude traders said, reflecting expectations of more oil supply bound for the region. Historically, WTI has traded at or above the price of Brent, a benchmark crude from Europe's North Sea region. Over the last few years Brent has fetched large premiums as surplus crude glutted the U.S. midcontinent. On Friday, Brent traded near $110 a barrel and WTI hovered near $93. "2013 will witness the largest build-out of takeaway capacity from the US midcontinent in history, with over 1 million barrels of new pipeline capacity and several hundred thousand bpd of new rail capacity," said Edward Morse, global head of commodities research at Citigroup. "These developments will have a permanent effect on crude spreads." Morse expects the WTI-Brent spread to average around $14 a barrel this year, although he said it is likely to experience "lots of volatility depending on production growth, pipeline flows and refinery maintenance." RECORD SUPPLIES IN CUSHING Last week, crude inventories at Cushing, Oklahoma, rose to a record high above 50 million barrels, according to data from the Energy Information Administration. Seaway, which formerly carried crude from the import-reliant Gulf Coast to Cushing, was reversed last year, but the most recent expansion more than doubles the line's capacity. In the physical crude markets of the U.S. Gulf Coast, light crude can fetch prices close to Brent, and a growing southbound flow of oil could eventually allow more oil producers in North America to sell at higher prices, instead of settling for current midcontinent discounts. Surging oil output from shale in North Dakota and Canada's tar sands have contributed to surplus crude in the Midwest, where refineries can't process it all. Due largely to new shale production, U.S. oil output rose to more than 7 million barrels a day last week for the first time since 1993. INCREASING THE FLOW Oil analysts expect Seaway and several other projects to help further narrow the WTI-Brent spread. Among them is the planned reversal of Magellan Midstream Partners' Longhorn pipeline, a 225,000 bpd line, which later this year should allow more crude from the Permian Basin of New Mexico and inland Texas to flow to the southern coast instead of into the midcontinent. The southern leg of TransCanada's Keystone XL pipeline, designed to carry around 550,000 bpd of additional barrels from Cushing to southern Texas, is also planned to start up by the end of 2013. The Keystone pipeline system expansion is designed to allow increased supplies of crude from Canada's oilsands region in Alberta to flow southward. But a northern section of the Keystone expansion has yet to win final approval from the U.S. government, after sparking controversy with environmental groups. Amid a lack of southbound pipeline capacity, a growing flow of crude by railroad has been making its way south from Canada, North Dakota and other northern U.S. locations to rail depots in spots like Louisiana and New Jersey. CANADA SEES NO RELIEF YET For Canadian oil producers, Seaway's expanded flow of crude from Oklahoma to Texas offered little relief to deeply discounted heavy crude prices there. Canadian drillers have had difficulty securing enough pipeline space to export all their barrels. Western Canada Select, a widely quoted heavy blend, sold for $41.25 a barrel under WTI on Friday. The discount has nearly quadrupled since the end of September. "Every pipeline to Cushing is already operating at maximum capacity -- (they) have been for months," a trader of Canadian crude oil said. The situation worsened on Thursday after Enbridge imposed mid-month apportionment on three of its Canada-United States pipelines, further reducing available short-term space to export barrels. (Additional reporting by Jeffrey Jones in Calgary, David Sheppard, Matthew Robinson and Robert Gibbons in New York, Swetha Gopinath in Bangalore and Kristen Hays in Houston.; editing by Sofina Mirza-Reid and Gunna Dickson)