Oil dives 2 percent, heads for biggest weekly drop in eight months

Oil fell more than 2 percent on Friday, extending the week's loss to the largest in eight months, pressured by swelling storage of crude on both land and sea.

US crude traded slightly above $40 a barrel while benchmark Brent was less than $2 from setting new 6-1/2-year lows.

The slump widened to oil products with US gasoline tumbling to 10-month lows.

Oil prices have fallen in seven of the last eight sessions, with losses accelerating after US government data on Thursday affirmed a seventh weekly rise in US crude inventories that took stockpiles near April's record highs.

The International Energy Agency (IEA) added to the bearish sentiment on Friday, saying there was a record 3 billion barrels of crude and oil products in tanks worldwide.

US crude's spot contract for December was at its widest discount in nearly three months to crude slated for delivery in a year.

The global glut has prompted traders to store more oil with the hope of selling later at higher prices.

The entire strip of futures prices for the next six months has weakened over the past four weeks as focus shifted back from strong oil demand toward oversupply.

Options trading has spiked with a soaring number of options taken to sell crude if prices fall to $40 or even $25.

"The evolving bearish global balances that we alluded to all year are acquiring increased transparency," said Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates.

US crude was down $1.20, or 2.8 percent, at $40.55 a barrel by 11:36am EST (1636 GMT). It fell above 8 percent on the week, its most since March.

Brent was off 36 cents, or nearly 1 percent, at $43.68 a barrel, its downside limited by the impending expiry of its front month December contract at Friday's settlement. For the week, Brent was down nearly 8 percent, also its most since March.

Oil was caught in a larger commodities selloff on Friday. The Thomson Reuters/Core Commodity CRB Index, a global benchmark, was near its lowest since 2002.

An estimated crude oversupply of between 0.7 million and 2.5 million barrels per day has resulted in prices dropping almost two thirds since June 2014.

The IEA said a mild 2016 winter could cause the overhang to rise in coming months.

Tens of millions of barrels are sitting on tankers at sea, looking for buyers and threatening logistical paralysis.