Oil up 2 percent after early swing on dollar, OPEC move

By Barani Krishnan

NEW YORK (Reuters) - Oil staged its first rally in three days on Friday, gaining 2 percent, despite warnings of more oversupply as a result of OPEC's decision to keep pumping crude without restraint.

A strong dollar, often enough to depress commodity prices, failed to stem the late run-up in Brent and U.S. crude futures, despite limiting their gains in choppy trade earlier.

"I guess some people wanted to take their oil shorts off before the weekend and put them on again next week. Otherwise how do you have a run-up on a day like this when OPEC promises to flood the market with more supply?" said Tariq Zahir, an oil bear at Tyche Capital Advisors in Laurel Hollow, New York.

Crude's biggest producers and shippers in the Organization of the Petroleum Exporting Countries agreed at a meeting in Vienna to stick to a policy of unconstrained output for another six months.

Oil prices rose right after the decision, as market bulls tried to make up for losses since Wednesday. Brent and U.S. crude fell nearly 3 percent a day in the past two sessions as traders locked in advanced bets that OPEC would not cut supply.

The dollar's surge on a stronger-than-expected U.S. jobs report for May sent the market on a tailspin, however. [FRX/] Crude fell more than $1 a barrel, with Brent hitting seven-week lows, before descending into extreme volatility until the late rally.

"The jobs report just blew away expectations and set the dollar on an unexpected run that tore into oil's gains," said Phil Flynn, analyst at the Price Futures Group in Chicago.

"But at the same time, bulls were already hedged for the OPEC decision not to cut output and ready for a relief rally after the losses of the past two days."

Brent settled up $1.28, or 2.1 percent, at $63.31 a barrel after tumbling to an April 16 low of $60.94, but it still fell 3.6 percent on the week.

U.S. crude jumped $1.13, or almost 2 percent to settle at $59.13, versus a session low of $56.83. For the week, it lost 2 percent.

The discount, or so-called "contango," between U.S. crude's front-month and second-month widened to its largest in a week as oversupply worries mounted after the OPEC decision.

"To me, this is really what people should be watching as the wider the contango gets, the weaker price will be going forth," said Zahir.

(Additional reporting by Vladimir Soldatkin in London and Henning Gloystein in Singapore; Editing by Chris Reese and Andre Grenon)