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US crude settles down 63 cents at $49.81, but closes the week up 3.3%

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.
Nick Oxford | Reuters

Oil fell more than 1 percent on Friday as players took profit on a rally with little pause over the past week that propelled prices nearly 15 percent to four-month highs on hopes of OPEC crude output cuts.

Also weighing on the market was the steady rise in U.S. oil drilling as prices trade at or near $50 a barrel. A closely-watch report from oil services firm Baker Hughes on Friday showed U.S. drillers adding rigs in 14 of the past 15 weeks.

Brent crude were down 65 cents, or 1.2 percent, $51.86 at 2:37 p.m. ET (1437 GMT), after touching $52.84 earlier, two cents below the 2016 high.

U.S. West Texas Intermediate (WTI) futures settled down 63 cents, or 1.3 percent, to $49.81 per barrel. They settled at $50.44 per barrel on Thursday — the first settlement above $50 since late June.

Despite the drop, Brent and WTI remain up more than 10 percent since the Organization of the Petroleum Exporting Countries wrong-footed many market participants eight days ago with its first production cut plan in eight years.

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OPEC is "back in business" of determining oil prices and only a "brave person" would bet against the cartel, an avowed oil bull Andy Hall said in a letter seen by Reuters to investors in his $2.5 billion hedge fund Astenbeck.

But with prices appearing to have gained too much, too soon — the Relative Strength Index for Brent and WTI was at 69 on Thursday, just below the overbought level of 70 — there was also pressure to liquidate. On Friday, the RSI for Brent was down at 67 while WTI fell to below 58.

"This is certainly not a one-way trade and we're seeing the other side acting now," said Tariq Zahir, a self-professed "oil bear" who specializes in timespread of U.S. crude futures.

"As much as the world wants to believe OPEC will cut some output, there are doubts what real good it will do to the oversupply. Also, there is some delayed reaction by oil to the strength of the dollar this week.

The dollar index hit a two-month high earlier in the day before paring gains on disappointing U.S. jobs data.

Since OPEC proposed its production cut plan in Algiers on Sept. 28, which it said will be formalized at its policy meeting in Vienna in November, officials of the group have embarked on an unusual flurry of meetings to nail down details.

First up, OPEC energy ministers meet Russian officials for informal talks in Istanbul on Oct. 9-13.

OPEC hopes to bring its output down to 32.5 million to 33 million barrels per day, cutting about 700,000 bpd from a global glut estimated by analysts at 1 million to 1.5 million bpd.

Top oil analyst on crude's rally

But the group's tendency to often max out production makes the market wary.

"This isn't really sustainable," Hamza Khan, head of commodities strategy with ING, said of the rally of more than $6-per barrel that occurred over the seven days. "It all could be over by next week."

Some warned this could ultimately hurt OPEC member nations by giving a boost to other producers.

"Many U.S. shale oil producers have now hedged their production, which is likely to put the brakes on the price rise," anaylsts at Commerzbank said in a note. "In other words, OPEC is shooting itself in the foot in the medium to long term."

In a sign of ongoing oversupply, top exporter Saudi Arabia cut its benchmark crude prices to Asia this week, and analysts at JBC Energy warned there was "a growing disconnect between the physical and the financial (oil) market" which would likely converge.

Meanwhile Libya exported the first oil tanker from the port of Zuetina since 2015, adding to global supplies.

HSBC on Friday said recent gains in Brent and WTI should be kept in perspective, cautioning that seasonal aspects of the price rally would fade again soon.