NEW YORK (CNNMoney.com) -- Oil prices plunged Wednesday as a stronger dollar, fueled by widespread fear of Europe's sovereign debt woes, lessened the appeal of buying crude.
But gasoline prices continued their climb, rising 1.5 cents a gallon in the latest survey conducted for motorist group AAA.
What prices are doing: Crude for June delivery fell $2.77, or 3.3%, to settle at $79.97 a barrel. This is the first day oil has settled below $80 since March 15.
Crude prices surged Monday amid optimism about Greece's $146 billion bailout and the possibility that the Gulf of Mexico spill could halt supply, but fell 4% Tuesday as worries about the debt crisis resurfaced. Crude prices are down 0.7% in the past week, but are about 52% higher than this time last year.
What's moving the market: Pessimism over Europe's debt crisis resurfaced, boosting the dollar and lessening the appeal of crude as an investment.
Fears that Greece's bailout would falter and that contagion throughout the debt-laden PIIGS nations - Portugal, Ireland, Italy, Greece and Spain - sent the dollar up 1.2% to a new 12-month high against the euro as investors shed riskier assets.
A stronger dollar makes crude, which is priced in the U.S. currency, more expensive for foreign investors, and tends to dampen demand and prices.
Greece's woes sent U.S. stocks plunging. Crude followed suit as traders saw the stock drop as a sign that the global economic recovery and energy demand would be hampered.
A bearish crude inventory report is also weighing on the oil markets.
The Energy Information Administration on Wednesday said that crude inventories rose 2.8 million barrels last week, nearly double the 1.54 million barrels analysts estimated, according to a survey by research firm Platts.
Gasoline stocks were up 1.2 million and distillates supplies - used for heating oil and jet fuel - jumped by 600,000. These were also much more than expected. Oil inventories have risen for 13 of the last 14 weeks, signaling to traders that demand is still weak.
What analysts are saying: "With economic nationalism threatening, the potential for the EU to break apart has weighed on the euro to the benefit of the dollar, which will also encourage crude selling," said Mike Fitzpatrick of MF Global.
The sell-off followed an announcement on Sunday that European officials agreed to provide Greece with a $146 billion bailout package in exchange for strict new austerity measures. But fears of contagion heightened last week after the sovereign debt of Portugal and Spain were downgraded and both countries were given a negative outlook.
This has led many investors to believe that the pain in Europe is only beginning, and that much more will need to be done to quell the crisis.
"The austerity measures already proposed that are causing so much social unrest will probably not be enough to placate either individual parliaments within the EU or the IMF," said Fitzpatrick.
"There is about as much chance of Greece meeting the May 18 payment deadline as there is that BP's contraption is going to work in the Gulf," he added.
Gasoline: Gas prices continued to rise, according to motorist group AAA. The average price of a gallon of regular unleaded gas on Wednesday was $2.919, up 1.5 cents from $2.904 on the previous day. Prices are more than 40% higher than this time last year.
Analysts expect that gasoline prices will peak within a tight range of $3 a barrel by the height of the summer driving season in the United States, the world's largest energy consumer, even taking into account the disruption from the BP oil spill in the Gulf of Mexico.
Prices would rise further if there was a surge in demand or a surprise geopolitical or environment event. Analysts say that - as of now - such events are unlikely.
Looking ahead: Traders will be looking to Thursday's initial claims report. But Friday's highly anticipated jobs report could move the market. Economists expect the unemployment rate to remain unchanged at 9.7%, despite strong signs of job growth.
|Overnight Avg Rate||Latest||Change||Last Week|
|30 yr fixed||3.90%||3.89%|
|15 yr fixed||2.96%||2.93%|
|30 yr refi||4.00%||4.00%|
|15 yr refi||3.06%||3.03%|
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