Oil prices drop on rising US rig count, China stock market probe

Oil prices dropped on Friday as a rising US rig count stoked fears of oversupply and after Chinese regulators opened an investigation into suspected stock market manipulation.

Front-month US crude futures were trading at $56.66 per barrel at 0707 GMT, down 27 cents from their last settlement.

That means US crude has fallen from a price range of $57-62 per barrel that it had been in since early May.

Brent crude futures were down 21 cents at $61.86 per barrel. But the contract remained in a downward trend that has been in place since early May and which has seen prices fall almost 10 percent.

"Negative sentiment stemmed from an increased US oil rig count (by 12 to 640), after dropping for six months. U.S. shale producers have brought down the breakeven cost from $35 to $20 per barrel," ANZ bank said on Friday.

"The current U.S. horizontal and vertical rig count across the Permian, Eagle Ford, Bakken and Niobrara shale plays implies that U.S. oil production growth will reach 135,000 barrels per day year-on-year by 4Q15," Goldman Sachs said on Friday.

The rising U.S. rig count adds to near record production by OPEC and Russia.

"The market decided to focus on the economy and the old story about the oil glut (in trading on Friday)," said Jonathan Barratt, chief investment officer at Sydney's Ayers Alliance.

"Summer drive time (in the United States) is not as strong, the rig count is up, (and) shale output is not translating into real demand as it should be," Barratt said.

"With oil prices at these (low) levels the concern is people have not stopped producing (which is adding to the oil glut)." The Greek economic and debt crisis and worries over China's commodities markets also weighed on investor sentiment, Barratt said.

He expected oil prices to move lower next week and could retest April's lows.

Traders said that Asia's commodity markets were also impacted by reports that China's regulators had opened an investigation into suspected market manipulation after a slump of more than 20 percent in Chinese stocks since mid-June.

On Thursday, Shanghai's benchmark composite index fell below 4,000 points for the first time since April - a key support level that analysts had expected Beijing to defend. They had predicted that more conservative investors would start closing out leveraged positions if the index dropped below 4,000.