NEW YORK Oil prices plunged more than $6 a barrel Friday, erasing gains from the previous day's big rally after the dollar strengthened and Russian troops began a long-awaited pullback in Georgia.
At the pump, a gallon of regular fell another penny overnight to a new national average of $3.692, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices had peaked at $4.114 a gallon on July 17, but have come down as high energy costs force Americans cut back on their driving.
A day after surging nearly $6 a barrel, crude reversed course and wiped out those gains as the U.S. dollar rose on comments by Federal Reserve Chairman Ben Bernanke that he would "act as necessary" to control inflation. Crude prices had risen for three straight days.
A falling greenback encourages selling from investors who bought crude oil and other commodities as a hedge against inflation and weakness in the U.S. currency. The euro fell to $1.4806 in early New York trading Friday from $1.4877 late in New York the night before.
"The dollar got pounded yesterday and everybody rushed to buy commodities as a safe haven. Now the dollar is strengthening so everybody's dumping commodities again," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.
Light, sweet crude for October delivery fell $6.45 to $114.73 a barrel in afternoon trading on the New York Mercantile Exchange. On Thursday, worries about Russian hostilities helped push prices up $5.62 to $121.18, crude's highest settlement price in over two weeks.
"Obviously, yesterday's rally was overcooked and we're simply taking back some of that speculative risk premium we injected into the market," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.
Russian troops began withdrawing from key Georgian positions on Friday, the day the pullback was to be completed under a U.S.-backed cease-fire. Still, there were conflicting statements about the extent of Russia's withdrawal.
Russia's defense minister said Friday the pullback from most Georgian territories to pro-Moscow separatist regions was complete, but U.S. State Department spokesman Robert Wood said that establishing buffer zones was "definitely not part of the agreement."
Oil traders were still eyeing the conflict amid concerns that another flare-up of violence could sever key oil shipments bound for Western countries. Russia is the world's second largest oil exporter, providing a quarter of EU countries' crude supplies and half of their natural gas.
"It's still speculative whether Russia will use oil as a weapon to punish the West," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "But it has certainly focused the market on that geopolitical threat."
The United States and Poland signed a deal Wednesday to place a U.S. missile defense base just 115 miles from Russia's westernmost border, a provocative move that was immediately denounced by Moscow.
Russia's Foreign Ministry warned that Moscow's response to further development of the missile defense shield would go beyond diplomacy.
U.S. Secretary of State Condoleezza Rice has dismissed any suggestion that the missile defense interceptors to be based in Poland constitute a threat to Russia. Washington insists the base is intended only as a defense against long-distance missiles from Iran.
London-based BP PLC last week shut down its Baku-Supsa oil pipeline which runs through the center of Georgia from Baku in Azerbaijan to Supsa on Georgia's Black Sea coast because of security concerns.
The line, which has a 150,000-barrel-a-day capacity, had recently been pumping around 90,000 barrels a day, according to a BP spokeswoman.
The British oil company also said that testing was to begin Wednesday on the closed Baku-Tbilisi-Ceyhan oil pipeline which runs through Georgia as well ahead of a move to restart full operations as early as next week.
That line, owned by a consortium of energy companies led by BP, has been closed for more than two weeks after a fire on its Turkish stretch. Kurdish rebels have taken responsibility for that blaze.
In other Nymex trading, heating oil futures fell over 16 cents to $3.13 a gallon, while gasoline prices lost about 18 cents to $2.865 a gallon. Natural gas futures shed 41.8 cents to $7.829 per 1,000 cubic feet.In London, October Brent crude fell $5.36 to $114.80 a barrel.
Associated Press writers Pablo Gorondi in Budapest, Hungary and Alex Kennedy in Singapore contributed to this report.