By Catherine Ngai
NEW YORK (Reuters) - Oil prices fell more than 2 percent on Friday, paring the previous session's spike as the market discounted an unexpected slump in U.S. crude inventories as a storm glitch.
Still, the market was on course to gain nearly 5 percent, its first weekly gain in three weeks, on hopes for a global deal on stabilizing crude output after Saudi Arabia, the leading oil producer inside OPEC, and Russia, the biggest producer outside the group, agreed on Monday to cooperate in oversupplied markets.
Brent crude (LCOc1) was down $1.35 at $48.64 a barrel by 11:52 a.m. ET (1552 GMT) after rising above $50 for the first time in two weeks on Thursday. U.S. crude (CLc1) was down $1.16 at $46.46.
Oil prices shot up on Thursday after U.S. government data showed the biggest weekly drop in stockpiles last week since January 1999 as Gulf Coast imports slumped to the lowest on record.
"We're pulling back after the big run-up yesterday. We're expecting supplies to rise next week as production is back up after the storm in the Gulf of Mexico," said Phil Flynn, an analyst at Price Futures Group in Chicago.
"People are covering their shorts now because the market ran too far too fast."
Greenback-denominated oil was also under pressure after the dollar index (DXY) rose on concerns over the health of the EU economy and on remarks by Federal Reserve policymakers helped boost investor expectations of a near-term increase in U.S. interest rates. [USD/]
While the market traded fairly thin on Friday, analysts and traders continued to debate how effective a deal would be to limit supply when OPEC and non-OPEC producers meet informally in Algeria on Sept.26-28.
Algeria's oil minister on Friday underscored that tension, saying that two separate agreements could be required between OPEC and non-OPEC producers, highlighting the difficulties of clinching such deals.
The oil options market indicates investors could well be holding out for a deal further down the line and are displaying a lot more optimism, as demand and supply come closer to falling into balance.
The International Energy Agency has said it expects oil demand to finally exceed supply in the third quarter of 2016, meaning record global crude stockpiles should start falling.
But analysts from Morgan Stanley (NYSE:MS) said in a note there were risks the market might not rebalance until later.
"Once again, we see an increasing probability for several unexpected bearish developments to come together, which could push off rebalancing (seasonally-adjusted demand exceeding supply) to late 2017, or even 2018," Morgan Stanley said.
The market was also watching for Baker Hughes rig count data set to be released around 1 p.m. EST. [RIG/U]