Oil in biggest weekly drop since January on dollar, rate-hike fear

By Barani Krishnan

NEW YORK (Reuters) - Crude oil prices closed down on Friday, with benchmark Brent losing its most in a week since January, as a resurgent dollar and fear of a U.S. rate hike diverted attention from the shrinking number of rigs drilling for oil in the United States.

Worries about the security of Libyan and Iraqi crude supplies, which had put a floor beneath the market in early trade, also took a backseat.

A strong dollar makes oil, quoted and traded in the greenback, costlier for holders of the euro and other currencies. The dollar rocketed to 11-/12-year highs against a basket of currencies after the U.S. government reported the U.S. jobless rate fell to 6-1/2-year lows.

Many U.S. Federal Reserve officials consider that to be full employment, and the central bank could decide on an interest rate hike in June.

Benchmark Brent oil settled down 75 cents, or 1.2 percent, at $59.73 a barrel. It fell 4 percent on the week, its sharpest decline since the week ended Jan. 9.

U.S. crude settled down $1.15, or 2.3 percent, at $49.61 a barrel. It posted a slight loss on the week, for a third straight week of declines.

"Today's focus is on the absolute strength of the dollar and what that could mean for near-term interest rates in the United States," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut. "The rig count data hasn't mattered as much, frankly."

The number of rigs drilling for oil in the United States fell by 64 this week to 922, the smallest number in operation since April 2011, oil services firm Baker Hughes said in a weekly survey.

It was a sign U.S. shale oil producers, which had flooded the market with crude supplies, were winding down output. Last week, the rig count fell by 33, the smallest decline since the year began. [RIG/U]

Oil traded higher earlier in the day, with Brent reaching above $61 and U.S. crude over $51, reacting to violence in northeast Iraq, where Islamic State militants had set ablaze oilfields. Libya had also closed 11 of its oilfields on worsening security.

While those situations were supportive to crude prices, traders were also wary of the West reaching a nuclear deal with Iran that would lift sanctions allowing Tehran to export more oil into an already flooded market.

(Additional reporting by Christopher Johnson in London and Florence Tan in Singapore; Editing by Dale Hudson, William Hardy, W Simon, Chizu Nomiyama and Lisa Shumaker)