Oil prices dropped Friday as a rising US rig count stoked greater concern about global oversupply, while an investigation by Chinese regulators into suspected stock market manipulation further unsettled the market.

A sharp move lower in late-morning US trade was exacerbated by thin liquidity, with many US market participants off for the Fourth of July holiday.

US oil drilling increased this week after 29 consecutive weeks of declines, the strongest sign yet that higher prices are coaxing producers back after an extended period of relatively cheap oil.

The number of oil rigs increased by 12 to 640 following a slump that cut the number of active US rigs from a peak of 1,609 in October to a nearly five-year low last week, energy services firm Baker Hughes Inc said.

"This is the first weekly increase in 30 weeks and is an indication that the slump in drilling activity has ended," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

"Oil prices have retreated on that news," Fritsch told Reuters Global Oil Forum.

Brent crude for August settled $1.75 lower at $60.32 a barrel, extending a downward trend that has sent prices down 13 percent since early May.

Front-month US crude was at $55.52, down $1.41, dropping below a trading range of $57 to $62 seen since early May.

"We have broken out of a two-month trading range and there are a lot of bearish factors that have come out, plus there are very, very thin volumes today," said Tariq Zahir, an analyst at Tyche Capital Advisers in New York.

The rising US rig count adds to near-record production by Russia and the Organization of the Petroleum Exporting Countries, which is feeding a huge oversupply.

OPEC oil supply hit a three-year high in June due to record or near-record output from Iraq and Saudi Arabia, a Reuters survey showed this week. The cartel's production is close to 2.5 million barrels per day above demand, filling stocks worldwide.

The Greek debt crisis ahead of a referendum Sunday and concerns over China's commodities markets weighed on investor sentiment.

Traders said commodity markets were also worried by reports that China's regulators had opened an investigation into suspected market manipulation after a slump of more than 20 percent in Chinese stocks since mid-June.

On Thursday, Shanghai's benchmark stock index fell below 4,000 points for the first time since April.

Reuters