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US oil settles down $1.01, or 2.42%, at $40.74 a barrel

Oil fell over 2 percent on Friday, extending the week's loss to the largest in eight months, pressured by swelling storage of crude on both land and sea.

Prices slipped slightly after Baker Hughes reported the number of oil rigs operating in the United States rose for the first time in 11 weeks.

The weekly count ticked up by 2 rigs to a total of 574, compared with 1,578 at this time last year.

Read MoreRecord oil stockpiles an 'unprecedented buffer': IEA

U.S. crude traded slightly above $40 a barrel while benchmark Brent was less than $2 from setting new 6½-year lows. The slump widened to oil products with U.S. gasoline tumbling to 10-month lows.

Oil prices have fallen in seven of the last eight sessions, with losses accelerating after U.S. government data on Thursday affirmed a seventh weekly rise in U.S. crude inventories that took stockpiles near April's record highs.

The International Energy Agency (IEA) added to the bearish sentiment on Friday, saying there was a record 3 billion barrels of crude and oil products in tanks worldwide.

Workers with Raven Drilling line up pipe while drilling for oil in the Bakken shale formation outside Watford City, North Dakota.
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U.S. crude's spot contract for December was at its widest discount in nearly three months to crude slated for delivery in a year. The global glut has prompted traders to store more oil with the hope of selling later at higher prices.

The entire strip of futures prices for the next six months has weakened over the past four weeks as focus shifted back from strong oil demand toward oversupply.

Options trading has spiked with a soaring number of options taken to sell crude if prices fall to $40 or even $25.

Read MoreOil price collapsing, could set new low

"The evolving bearish global balances that we alluded to all year are acquiring increased transparency," said Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates.

U.S. crude closed $1.01 lower, or 2.42 percent, at $40.74 a barrel. It fell about 8 percent on the week, its most since March.

Brent was off 46 cents, or 1.04 percent, at $43.60 a barrel. Its downside was limited by the impending expiry of its front month December contract at Friday's settlement. For the week, Brent was down nearly 8 percent, also its most since March.

Oil was caught in a larger commodities selloff on Friday. The Thomson Reuters/Core Commodity CRB Index, a global benchmark, was near its lowest since 2002.

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An estimated crude oversupply of between 0.7 million and 2.5 million barrels per day has resulted in prices dropping almost two thirds since June 2014.

The IEA said a mild 2016 winter could cause the overhang to rise in coming months.

Tens of millions of barrels are sitting on tankers at sea, looking for buyers and threatening logistical paralysis.

— CNBC's Tom DiChristopher contributed to this report.