By David Gaffen
NEW YORK (Reuters) - Oil ended its strongest week this year with a surge on Friday, built on receding fears of oversupply, as U.S. crude came within striking distance of $50 a barrel for the first time since the end of May.
Traders attributed the activity to short-covering of previous bearish bets as oil finished higher in every session this week. U.S. crude settled at $49.71 a barrel, up 67 cents, or 1.4 percent, and on the week gained nearly 9 percent.
The market was bolstered by bigger-than-expected inventory drawdowns on Wednesday and signals from Saudi Arabia that the world's biggest oil producer would further reduce output in August.
"The bullish inventory report this week has helped confirm the declining trajectory of global inventories," said Sarp Ozkan, analyst at Drillinginfo.com. That, along with Saudi Arabia reducing exports, has "buoyed the expectations of continued inventory normalization."
U.S. crude and gasoline inventories fell much more steeply than expected in the latest week, while U.S. refineries processed an average of almost 17.3 million barrels of crude per day last week, up 620,000 bpd from the same week in 2016.
Brent crude futures settled at $52.52 a barrel, up 2 percent, or $1.03 a barrel, after reaching a two-month high of $52.68 a barrel earlier in the day.
The gains in Brent pushed the difference between the two benchmarks to the widest in two months.
September Brent was now priced higher than October, meaning the front of the curve has flipped into backwardation.
Short covering in the September contract contributed to the rally in the front-month spread, traders said. Physical markets have firmed due in large part to very strong refining margins.
"Both markets are seeing a strong move in spreads through most of 2017 and 2018 due to shorts covering into heavy producer flow," said Scott Shelton, broker at ICAP in Durham, North Carolina.
"Overall, I think the bullish demand story is taking the headlines away from the supply story as products are strong globally when refinery runs are maxed and that implies that current demand expectations could be significantly below reality."
U.S. oil drillers added two rigs in the most recent week, the third week of gains, raising the overall rig count to 766. For the month, 10 oil rigs have been added, the fewest for a month since May 2016.
Royal Dutch Shell Plc extended its force majeure on exports of Nigeria's Bonny Light crude oil to cover the outage of the Trans Niger pipeline, the company said on Friday, providing further support to Brent crude.
On Sunday, Venezuela is due to hold a vote that would allow President Nicolas Maduro's ruling party to rewrite the constitution in a controversial move that critics have said is a plan establish a dictatorship. The United States is considering sanctions against the oil exporter that could raise certain oil prices.
(Additional reporting by Karolin Schaps in London, Jane Chung in Seoul; Editing by David Gregorio and Toni Reinhold)