Oil sinks as global economy slows

Crude slides on stronger dollar, concerns about flagging global demand.

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By Kenneth Musante, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Oil prices sank Friday as the dollar continued to climb and investors feared that weak economic growth would translate into lower crude demand worldwide.

U.S. crude for September delivery touched a low of $111.34 a barrel - the lowest level since April. But the market regained some ground later in the session and oil settled down $1.24 at $113.77 a barrel on the New York Mercantile Exchange.

Oil futures have tumbled about 33% since striking an all-time high of $147.27 a barrel last month.

Dollar strength: The U.S. dollar charged higher, pressuring many investors to pull money out of oil.

The dollar rose against all major currencies Friday and hit its highest level in nearly two years against the British pound.

Crude is traded in dollars, and a stronger greenback makes oil relatively more expensive to foreign buyers. Many investors have also been buying oil to hedge against dollar inflation.

"Crude probably has to move lower in the short term - perhaps to $105 or even $100 - before we can wring out the last bastions of speculative excess that are baked into the price," Tom Orr, head of research for Weeden & Co., wrote in an email.

Global woes: Oil futures were also under pressure after economic data released this week suggested the global economy is slowing significantly.

Reports from Europe, Asia and the United States all pointed to the possibility of lower oil demand worldwide.

"When you see evidence from several areas, people are much more likely to believe in demand decline," Neal Dingmann, senior energy analyst with Dahlman Rose & Co., said.

A report on Thursday from the European Union's statistics office showed the 15-nation euro zone economy contracted by 0.2% in the second quarter.

The euro zone's three largest economies - Germany, France and Italy - all shrank during the period.

Meanwhile, a report released earlier in the week showed the Japanese economy contracted in the second quarter.

"There's a slowdown in demand for oil and copper and the whole gamut of industrial commodities," said Paul Kasriel, chief economist with Northern Trust.

Because of slowing growth overseas many expect non-U.S. central banks such as the Bank of England and the European central banks to start cutting their key interbank lending rates to inject cash into their economies, according to Kasriel. However, that would also weaken their currencies and add strength to the dollar.

The U.S. Federal Reserve has held rates at 2%, citing inflation as a concern.

High fuel prices pushed inflation to an annual rate of 5.6% in July - the highest level in 17 years - according to the Labor Department.

U.S. gas prices fell for the 29th straight day to an average of $3.771 at the pump, AAA reported Friday. Gas prices have fallen below $4 a gallon in all but six states. However prices remain more than $1 above where they were a year ago. To top of page

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