Oil sinks to 3-month low

Oil drops below $120

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NEW YORK (CNNMoney.com) -- Oil prices tumbled a 3-month low near $115 a barrel Friday as the dollar rallied strongly against slumping foreign currencies and concerns about a Turkish supply disruption were eased.

Light, sweet crude for September delivery settled down $4.82 to $115.20 on the New York Mercantile Exchange. It was the lowest close since May 1, when oil finished at $112.52.

Crude reversed course after settling higher Thursday, as the dollar hit a 5-month high against the euro.

The 15-nation euro bought $1.5017, down 2% from Thursday's levels. The British pound fell 1.4% to a 17-month low of $1.9164, and the dollar rose 0.8% against the Japanese currency to ¥110.275.

Oil is traded in dollars, and investors had been using it and other commodities to hedge against inflation. But as the dollar began to rebound, investors shifted their money to other investments such as stocks and bonds.

Investor fears about the deterioration in the European economy contributed to the dollar's rebound. Poor economic reports from the 15-nation euro zone on Friday followed a decision by the European Central Bank a day earlier to hold a key interest rate steady in order to keep cash flowing to the financial industry.

"So much of the buying we saw since last August when oil was trading at $68 a barrel was predicated on a weak dollar," said Peter Beutel, an oil analyst with Cameron Hanover Oil. "As the dollar is gaining now, we're seeing an unwinding of those positions in oil."

"There's no reason why we can't see an unwinding of positions back to the $68 to $79 level," said Beutel. "This market can always go further and faster than anyone will believe."

Oil has fallen more than $32, or nearly 22%, from the record high of $147.27 set July 11.

Pipeline fixed: Crude bounced off a three-month low Thursday to settle more than $1 higher after Turkey's Baku-Tbilisi-Ceyhan oil pipeline was attacked by a Kurdish rebel group Tuesday night. Reports emerged Thursday that the pipeline, which pumps nearly 1 million barrels a day, could remain closed for up to two weeks.

But Friday reports emerged that the oil had been rerouted over other pipelines. That news helped send crude even lower, as supply concerns were eased.

Gas prices: The average price of gasoline fell 1.3 cents to $3.836 per gallon in the United States, declining for the 22nd straight day, according to a daily survey from motorist advocacy group AAA. Gas is down nearly 7% from the record high of $4.114 set July 16.