U.S. crude slumps 4 percent on stronger dollar, glut warning

NEW YORK (Reuters) - Oil prices fell on Friday, with U.S. crude down nearly 4 percent and headed for its worst week in three months, on a renewed rally in the dollar and warnings of an oil glut by the global energy watchdog.

Benchmark Brent crude fell more than 2 percent on the day and was on track to its sharpest weekly decline in two months as a weaker U.S. stock market <.SPX> applied further pressure on oil.

Also weighing on the market was the prospect of Iran reaching a partial nuclear deal with world powers by end March and a full agreement by June. Such a deal could end sanctions against Tehran, enabling it to export even more crude that would suppress prices.

Data from oil services firm Baker Hughes showing a four-year low in the number of rigs drilling for oil in the United States also failed to stir buying. Baker Hughes said the rig count fell by 56 this week to 866, the lowest since March 2011.

Brent fell $1.40, or 2.5 percent, to $55.68 a barrel by 1:09 p.m. EDT, after hitting a one-month low at $55.37. It was on track to a 7 percent drop on the week, its largest decline since mid-January.

U.S. crude was down $1.81, or almost 4 percent, at $45.24, after falling to a Jan. 30 low of $45.01. It was headed for a 9 percent loss on the week, its most since mid-December.

With U.S. crude falling faster than Brent, the spread between the benchmarks, one of the biggest volume trades in oil, widened to nearly $11 a barrel in Friday's session, the largest gap in 10 days.

The dollar rose again after Thursday's pause, eyeing for parity with the euro. A stronger dollar makes dollar-denominated commodities, such as oil, costlier for holders of other currencies.

The International Energy Agency, which advises industrialized countries on energy, warned that a global oil glut was building and the United States may soon run out of empty tanks to store crude.

"U.S. supply so far shows precious little sign of slowing down," the IEA said. "Quite to the contrary, it continues to defy expectations."

While OPEC output declined in February, global supply was up by 1.3 million barrels per day (bpd) year-on-year at 94 million bpd, led by a 1.4 million bpd non-OPEC increase, the IEA said.

(Additional reporting by Christopher Johnson in London and Keith Wallis in Singapore; Editing by Marguerita Choy)

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