Oil Down Modestly; Late Short-covering Limits Dollar Impact

Crude oil prices ended little changed on Friday as short-covering returned in late trading, after some weakness earlier in the session as the U.S. dollar rose on robust U.S. jobs data.

The dollar surged initially on upbeat U.S. employment growth for July, heading for what appeared to be the greenback's biggest advance in six weeks, before paring gains.

A stronger dollar typically makes oil and other commodities denominated in the greenback less affordable to holders of the euro and other currencies, reducing demand for them.

Oil, which fell nearly 2 percent earlier in the session, pared losses as the dollar wound back gains. Investors who made money earlier this week being bearish when U.S. crude fell below $40 the first time since April also cashed out of short positions, helping prices recover, traders said.

"There are still many out there who fear a further oil price rebound at this point, and that's probably what sparked the late short-covering," said Phil Flynn, analyst at the Price Futures Group in Chicago.

Some dispute that, saying oil is headed lower again. Hedge funds, some of the biggest bulls in oil, were holding the least number of positive bets on U.S. crude since February, data on Friday showed.

"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.

"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."

The September front-month contract in WTI, or U.S. West Texas Intermediate (WTI) crude, settled down 13 cents, or 0.3 percent, at $41.80 per barrel, after falling nearly 2 percent earlier. The October contract, which will become the front-month starting on Aug 23, settled at $42.57.

Brent crude's front-month settled down just 2 cents at $44.27 per barrel. Earlier in the session, it fell to $43.51.

For the week though, Brent rose more than 4 percent while WTI was marginally lower, helped by a near 6 percent rally over the past two sessions.

Rebalancing the oil market has proved a long and frustrating process as oil-exporting countries hard hit by the 2014-15 price slump were themselves some of the fastest-growing oil consumers.

WTI timespreads weakened earlier this week, with the December contract for 2016 versus 2017 <CLZ6-Z7> reaching a discount of more than $4 a barrel, its widest in nearly 8 months. That indicated eroding demand for oil slated for nearer-term delivery.

U.S. oil rigs, meanwhile, rose for a sixth straight week this week, industry data showed, signaling more output.

In oil market news, Russian Energy Minister Alexander Novak told Reuters there were no discussions about possible coordination with OPEC on oil output after a failed attempt to jointly maintain production levels earlier this year.

(Additional reporting by Libby George in LONDON and Henning Gloystein in SINGAPORE; Editing by Richard Chang and Jonathan Oatis)