Oil prices closed lower on Friday as the dollar surged on robust U.S. jobs data, reasserting its influence over commodities as two days of short-covering and bargain-hunting in crude fizzled, bringing attention back to oversupplies.
Also on Friday, the number of rigs operating in U.S. oil fields rose for a sixth straight week, increasing by 7 rigs to a total of 381. At this time last year, drillers had 670 rigs in fields.
A stronger dollar makes oil and other commodities denominated in the greenback less affordable to holders of the euro and other currencies, typically denting demand for such raw materials. The reverse is the case when the dollar falls.
In recent weeks, however, the dollar/oil trade appeared to have broken down as crude futures fell despite the U.S. currency weakening.
"The dollar/oil correlation may be back today to pressure crude but the reality is we just have too much oil supply out there to continue supporting prices at these levels," said Phil Davis, trader at PSW Investments in San Diego, California.
"We might hold above $40 next week but I doubt we will be trading at $42 when the new WTI front-month comes into play."
U.S. West Texas Intermediate (WTI) crude crude futures settled 13 cents lower, or 0.31 percent, at $41.80 a barrel.
International Brent crude futures were trading down 2 cents at $44.27 per barrel.
Friday's slump ended a mid-week rally driven in large part by those holding short positions booking profits from a more than 20 percent fall in oil prices between June and early August, traders said.
"Since there was no news yesterday that might have triggered the price rise, this points to short-covering," Commerzbank analyst Carsten Fritsch said.
"Clearly many market participants were caught on the hop by the increase in prices following the publication of U.S. inventory data on Wednesday," he said.
For the week though, Brent was on track for a gain of about 3 percent while WTI was marginally lower, helped by technical short-covering and bargain-hunting that pushed oil prices up by nearly 6 percent over the past two sessions.
The mid-week rebound came after WTI broke the key $40-per-barrel support on Monday and settled below that level on Tuesday for the first time since April.
Even so, WTI timespreads weakened earlier this week, with the December contract for 2016 versus 2017 reaching a discount of more than $4 a barrel, its widest in nearly eight months. That indicated eroding demand for oil slated for nearer-term delivery.
Rebalancing the oil market has proved a long and frustrating process as oil-exporting countries hit hardest by the 2014-15 price slump were themselves some of the fastest-growing oil consumers.
Some traders also worry that net Chinese oil imports will weaken this year despite China surpassing South Korea as the top Asian buyer of North Sea Forties crude.
"A major pillar of oil demand is therefore on course to ease considerably over the coming months," Stephen Brennock, analyst at London-based broker PVM, said.
Still, China surpassed South Korea as the top Asian buyer of North Sea Forties crude this year, while trading house Trafigura was aggressively targeting China's newest buyers by extending credit to two of the country's independent refiners.