Oil down slightly; U.S. rig count drop offsets stockpiles surge

By Barani Krishnan

NEW YORK (Reuters) - Oil prices were down slightly by late Thursday afternoon, paring much of the day's losses, after a renewed drop in the U.S. oil rig count offset weaker sentiment caused by record high U.S. crude stockpiles.

U.S. energy firms cut oil rigs again this week, after a pause last week, data from oil services company Baker Hughes showed. With this week's drop of 15 rigs to 372, it was the lowest rig count for oil since November 2009.

U.S. crude's front-month contract was down 35 cents at $38.44 a barrel by 1:59 p.m. EST (1759 GMT), after falling nearly $1.50 earlier. It also turned positive for the week, staying on course to a sixth straight week of gains.

Brent's front-month was down 17 cents at $40.30, recovering from an earlier drop of $1.25. Brent remained on track to a 2 percent fall on the week, its first in six weeks.

Oil prices slumped earlier, with U.S. crude down 4 percent and Brent sliding below $40 on extended bearish sentiment after Wednesday's data showing a 9.4 million barrels rise in U.S. crude stockpiles last week - a build three times above market expectations.

While this week's drop of 15 rigs wasn't a game changer in an oversupplied oil market, it offset some of the headwinds for oil prices, brokers and analysts said.

"After last week's increase of one rig, some may have assumed that the continuing decrease in rig counts was finally abating," said Pete Donovan, broker at Liquidity Futures in New York. "Apparently not so."

The rig count has become an important indicator for production amid worries that global oil markets were oversupplied by up to two million barrels per day.

Shares on Wall Street , trading in tandem with crude most of this year, also clawed back from the lows of the day.

The dollar , meanwhile, erased early gains that made oil and other commodities denominated in the greenback less affordable to holders of the euro and other currencies.

Volumes in oil were thinner than usual ahead of the Good Friday and Easter break, typical with other financial markets.

(Additional reporting by Simon Falush in LONDON; Editing by Marguerita Choy and Andrew Hay)