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Oil retreats on stronger dollar, U.S. crude discount wider
* Record U.S. production drives WTI down for second week
* WTI-Brent spread hits three-year high
* Russia has potential for oil output hike within months
* U.S. drillers add oil rigs for second week in row -Baker Hughes (New (KOSDAQ: 160550.KQ - news) throughout, updates prices and market activity to settlement)
By Jessica Resnick-Ault
NEW YORK, June 1 (Reuters) - Oil prices retreated on Friday, after the dollar rose on better-than-expected U.S. employment data, which pressured greenback-denominated commodities, including crude.
U.S. West Texas Intermediate (WTI) crude futures fell $1.23 a barrel to settle at $65.81 a barrel. For the week, WTI was on track to drop about 3 percent, adding to last week's near 5 percent decline.
Global benchmark Brent fell 77 cents to $76.79 a barrel. It was set for a 0.4 percent gain for the week.
WTI's discount to Brent (WTCLc1-LCOc1) widened, settling at $11.02 a barrel after ballooning to as much $11.57 during the session, largest since 2015.
Domestic job growth accelerated in May and the unemployment rate dropped to an 18-year low of 3.8 percent. The U.S. Labor Department's report also showed solid wage gains, which boosted expectations that the Federal Reserve would hike interest rates in June and later this year as well.
The strengthening dollar sparked selling in dollar-denominated commodities, said John Kilduff, a partner at Again Capital Management.
Concerns about growing U.S. crude production and a glut trapped inland due to a lack of pipeline capacity have pressured prices of WTI, doubling its discount to Brent over the course of a month.
U.S. crude production rose in March by to 10.47 million bpd, a monthly record, the Energy Information Administration said on Thursday.
On a weekly basis, it rose to 10.8 million bpd last week, close to top producer Russia, the EIA said.
"The weekly number suggesting U.S. production is really strong and continuing to rip higher," said Matt Smith, director of commodity research at ClipperData. But without adequate transportation to get crude to the coasts, "we're going to continue to see some weakness in WTI," he said.
U.S. drillers added two oil rigs in the week to June 1, bringing the total to 861, the most since March 2015, General Electric Co's Baker Hughes energy services firm said on Friday. That was the eighth time drillers added rigs in the past nine weeks.
Saudi Arabia, effective leader of the Organization of the Petroleum Exporting Countries, and Russia have discussed boosting output to compensate for supply losses from Venezuela and to address concerns about the impact of U.S. sanctions on Iranian output. Any rise in production would be gradual, a Gulf source said.
Russia could raise oil output within months if there is a decision to unwind the pact, a Russian Energy Ministry official said.
(Additional reporting by Stephanie Kelly in New York, Roslan Khasawneh and Naveen Thukral and Shadia Nasralla in London; editing by David Gregorio and Marguerita Choy)
