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UPDATE 2-Oil drops 1%, set for biggest monthly fall since November as trade wars spreads

Colin Packham and Henning Gloystein

wars spreads@

* Trump announces import tariffs on Mexican goods

* U.S. already in trade war with China

* Analysts fear recession as trade conflict spreads

* U.S. output at record 12.3 mln bpd: (Adds comment, updates prices)

SYDNEY/SINGAPORE, May 31 (Reuters) - Oil prices fell by more than 1% on Friday and were on track for their biggest monthly fall since November as trade conflicts spread and U.S. crude output returned to record levels.

Front-month Brent crude futures, the international benchmark for oil prices, were at $65.97 at 0639 GMT, down by 90 cents, or 1.4%, from last session's close.

U.S. West Texas Intermediate (WTI) crude futures were at $55.92 per barrel, down 67 cents, or 1.2%, from their last settlement. WTI earlier marked its lowest since March 8 at $55.66 a barrel.

The drops mean that crude oil futures are on track for their biggest monthly loss since last November.

U.S. President Donald Trump ramped up trade tensions globally by vowing to slap tariffs on all goods from Mexico, firing up fears over economic growth and appetite for oil.

The Mexico trade dispute adds to a trade war between the United States and China, which many analysts expect to trigger a recession.

"All is not well with the economic world, at least according to bond and commodity traders," Michael McCarthy, chief market strategist at futures brokerage CMC Markets in Australia, wrote in a note published on Friday.

"These (price) moves signal deteriorating sentiment about the outlook for global growth," he said.


Crude prices have also been under pressure from a much smaller-than expected decline in U.S. stockpiles and U.S. crude oil production's <C-OUT-T-EIA> return to its record 12.3 million barrels per day.

The U.S. Energy Information Administration (EIA) said U.S. crude stocks fell by around 300,000 barrels last week, to 476.49 million barrels <C-STK-T-EIA>.

That was much less than the 900,000-barrel decline analysts forecast in a Reuters poll and well below the 5.3 million-barrel drawdown the American Petroleum Institute (API) reported on Wednesday.

U.S. investment bank Jefferies said on Friday that Brent had been falling "on the U.S.-China trade war saga and U.S. inventory builds with this week's draw too small to impress the market."

Meanwhile, top oil exporter Saudi Arabia has raised production in May, a Reuters survey found, but not by enough to compensate for lower Iranian exports which collapsed after the United States tightened the screws on Tehran.

Washington will sanction any country which buys oil from Iran after the expiration of waivers on May 2, U.S. Special Representative for Iran Brian Hook said on Thursday.

(Reporting by Colin Packham in SYDNEY and Henning Gloystein in SINGAPORE; Editing by Joseph Radford)