Oil prices dip as dollar strength adds to glut fears

Crude prices slid on Thursday as early optimism gave way under the weight of a climbing U.S. dollar and a persistent global overhang of physical oil.

The greenback rose on Thursday afternoon after the release of strong U.S. economic data, making it more expensive for holders of other currencies to buy oil priced in dollars.

Benchmark North Sea Brent crude oil fell by 25 cents to $49.41 a barrel by 1315 GMT after hitting a session high of $50.39.

U.S. crude was down 40 cents at $42.90 per barrel.

"It's mainly driven by the U.S. dollar, but it's aided by the bearish fundamentals," Commerzbank analyst Carsten Fritsch said.

U.S. crude futures were under greater pressure as problems with a major refinery in the U.S. Midwest cast doubt on the country's ability to process its own oil.

The discount of U.S. crude futures versus dated Brent CL-LCO1=R grew to more than $6.50 per barrel from a discount of less than $4 early last week.

While traders said early signs of falling U.S. oil production had been supportive for prices, the problems that took out BP's 165,000-barrels-per-day Whiting, Indiana refinery raised concerns that the U.S. oil storage hub at Cushing, Oklahoma, could fill.

"The BP mishap could result in a backup in inventories in both Patoka and Cushing and result in a build in Cushing crude oil inventories in the coming weeks," said Dominick Chirichella, a U.S.-based consultant.

Other bearish signals also weighed on prices.

OPEC's second-largest producer, Iraq, plans to export near-record volumes of Basra crude in September, adding to an already oversupplied market.

The U.S. Energy Information Administration also said on Thursday that Iran's release of oil held in storage could boost global supplies by 100,000 barrels per day this year, and that it had the "technical capability" to boost output by 600,000 bpd by the end of next year.

Additionally, while the International Energy Agency said on Wednesday that it expects 2015 demand growth to hit a five-year high, China's shaky economy, and recent moves by Beijing to devalue its currency, cast doubt on the country's potential oil consumption.

China's implied oil demand fell in July from the previous month amid a drop in vehicle sales.

"All is not well with the Chinese economy," Howie Lee of Phillip Futures told Reuters Global Oil Forum.

Falling margins at Asian refineries have led Chinese and Korean refiners to cut production, thus lowering their demand for crude oil.