Oil dropped below $US50 in New York for the first time since December as concerns that OPEC's output cuts are failing to restrain record US stockpiles triggered the biggest slump in more than a year.

West Texas Intermediate closed at the lowest since November 29, the day before OPEC approved the first supply cuts in eight years. Crude supplies rose 8.2 million to the highest level in weekly government data since 1982. Harold Hamm, the US shale oil billionaire, warned that the industry could "kill" the market if it embarks on another spending binge. The market swoon stoked the second-highest WTI options trading volume ever and sent volatility surging.

Oil had fluctuated above $US50 a barrel since the Organisation of Petroleum Exporting Countries and other nations started trimming supply for six months starting January 1 to reduce a global glut. While US shale production has rebounded, larger-than-expected cuts elsewhere and signs of growing demand suggest stockpiles will eventually decline, according to Goldman Sachs.

"People are nervous about the global supply-demand balance," Adam Sieminski, a scholar at the Center for Strategic and International Studies in Washington and former head of the Energy Information Administration, said by telephone. "Shale is coming back with $US50 oil and there's uncertainty about whether OPEC and its partners are going to roll-over the production agreement."

West Texas Intermediate for April delivery dropped $US1, or 2 per cent, to close at $US49.28 a barrel on the New York Mercantile Exchange. Total volume traded was about 85 per cent above the 100-day average. The contract has tumbled 7.6 per cent in four days.

In post settlement trading, WTI oil pared some of its losses to trade down 1.2 per cent at $US49.67 a barrel, as of 3.55pm New York time.

Brent for May settlement slipped 92 cents to $US52.19 a barrel on the London-based ICE Futures Europe exchange. It was the lowest close since November 30. The global benchmark crude closed at a $US2.36 premium to May WTI.

"If we settle below $US50 tomorrow there's a good chance that we'll come in Monday to see some liquidation," Kyle Cooper, director of research with IAF Advisors in Houston, said in an interview.

WTI options volume jumped to more than 550,000 on Thursday, according to preliminary Bloomberg data. Oil market volatility, as measured by the CBOE Crude Oil Volatility Index, rose to a three-month high at the close of trading.

"We're seeing a huge spike in demand for options on the move below $US50 for WTI," Clayton Rogers, an energy derivative broker at SCS Commodities in Jersey City, New Jersey, said by telephone.

Saudi Arabia's Oil Minister Khalid Al-Falih said this week global inventories are falling slower than expected, opening the door to extend the output-cut deal beyond its initial six months.

"I think there will be a rollover of the agreement, but I don't think the Saudis are going to rollover to Russia, Iran and Iraq," Sieminski said. "We will have to see compliance from them."

"The bottom line here is you have wide compliance within OPEC with the production cuts and on the other hand you have increased production out of the US," Hans Goetti, chief strategist for the Middle East and Asia at Banque Internationale a Luxembourg, said in a Bloomberg television interview. "The shale oil industry in the US has made great strides to cut costs."

US crude production increased for a third week to 9.09 million barrels a day, the EIA said Wednesday. The nation's output is projected to surge to a record 9.73 million barrels a day next year, according to the EIA's monthly Short-Term Energy Outlook on Tuesday.

Crude stockpiles at Cushing, Oklahoma, the delivery point for WTI and the biggest US oil-storage hub, rose a second week to 64.4 million barrels, the EIA reported.

Oil-market news:

• Production from Libya's Waha Oil Co, a venture between the nation's state oil company and foreign partners, may be suspended as clashes in the country's east keep the main export terminals out of service.
• Royal Dutch Shell will sell almost all its production assets in Canada's oil sands in a $US7.25 billion deal that cuts debt and reduces involvement in one of the most environmentally damaging forms of fossil-fuel extraction.
• Iraq's oil exports fell 50,658 barrels a day to 3.27 million barrels a day in February, according to a statement from the Oil Ministry.