July 29 (Bloomberg) -- Crude oil fell to the lowest in 12 weeks as the U.S. dollar strengthened to a one-month high against the euro and on signs gasoline demand may extend declines.

Oil has dropped 17 percent since its July record as the rising dollar curbed the appeal of commodities as an inflation hedge. A report tomorrow may show that gasoline supplies rose for a fifth straight week, according to the median of 11 estimates in a Bloomberg News survey of analysts. Gasoline use has slipped for 14 straight weeks, MasterCard Inc. reported today.

``A stronger dollar translates into weaker crude,'' said Tom Bentz, a broker at BNP Paribas in New York. ``The market is still kind of in this downward trend here in the short term and is having troubling turning back up.''

Crude oil for September delivery fell $2.54, or 2 percent, to $122.19 a barrel at 2:45 p.m. on the New York Mercantile Exchange, the lowest close since May 6. Oil, which surged to a record $147.27 a barrel on July 11, fell as low as $120.42 today.

The dollar strengthened 1 percent to $1.5581 against the euro at 2:54 p.m. in New York, from $1.5741 yesterday, limiting the appeal of commodities as an inflation hedge. It touched $1.5554, the strongest level since June 25. The U.S. currency appreciated 0.6 percent to $108.14 yen, from 107.46 yesterday.

The Energy Department report tomorrow will probably show that gasoline inventories rose 400,000 barrels last week, according to the Bloomberg survey.

Gasoline Falls

U.S. motorists drove less for a seventh consecutive month in May, as vehicle-miles traveled on all U.S. roads fell 3.7 percent during the month from a year earlier, the Federal Highway Administration said in a report yesterday. The seven-month slide is the longest downward streak since 1979.

Demand for oil and petroleum products dropped 4.3 percent in May from a year earlier to 19.7 million barrels a day, according to Energy Department data released yesterday. That's 889,000 barrels a day less on average for the first five months of the year, compared with the same period a year before.

``This demand thing has some bite,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``I can really see a crude market here that could drop down to $100 by the end of summer or early fall.''

Gasoline futures for August delivery fell 6.23 cents, or 2 percent, to $3.0077 a gallon in New York. The price touched $2.9801, the lowest since May 5.

``Products are the weakest players out there, which is understandable, given that that's where the demand is being reduced,'' said Addison Armstrong, director of market research at TFS Energy LLC in Stamford, Connecticut.

Eye on Asia

As U.S. demand falls, ``everybody's going to start keeping an eye on the Far East and the underdeveloped countries to see whether their demand is shrinking,'' Armstrong said. Consumption in China after the Olympic Games end will be key in determining the market's future direction, he said.

Regular gasoline at the pump, averaged nationwide, fell 1.7 cents to $3.941 a gallon, AAA, the nation's biggest motoring group, said today on its Web site.

OPEC President Chakib Khelil said crude-oil prices are ``abnormal,'' and the producer group shouldn't cut output because it needs to ensure adequate supply.

``The oil price is too high, everybody agrees on this,'' Khelil, who is also Algeria's oil minister, said in Jakarta today. This benefits neither producers nor consumers, he said.

Political Tensions

If the dollar strengthens and political tensions in the Middle East ease, then the long-term oil price will be about $70 to $80 a barrel, Khelil said.

The Organization of Petroleum Exporting Countries produces about 40 percent of world oil supplies.

Oil prices have dropped more than $25 a barrel from the July 11 record.

``This time of year, you typically have a selloff of between 19 and 20 percent,'' which would equate to about $118 a barrel, said Raymond Mazzeo, director of energy derivatives at Energy Merchant Intermarket Management LLC in New York. A decline below $116.69, the halfway point between this year's high and low, ``would be very bearish.''

September $115 put contracts, which represent the right to sell oil at that price, were the most actively traded options on the Nymex today. The contract rose 29 cents to $1.95, or $1,950 a contract at 2:45 p.m. Open interest on the contract was 21.9 million barrels.

BP Rises

BP Plc, Europe's second-largest oil company, said second- quarter earnings rose 28 percent as crude surged to a record and natural-gas prices increased.

Net income advanced to $9.47 billion, or 49.8 cents a share, from $7.38 billion, or 38.18 cents, a year earlier, the London- based company said today in a statement. Excluding inventory changes and one-time items, profit beat analysts' estimates.

BP will ``vigorously defend'' its rights in a battle with its billionaire partners over control of TNK-BP, the Russian venture that provides almost a quarter of its total output, while warning other investors to beware.

Brent crude for September delivery fell $3.13, or 2.5 percent, to $122.71 a barrel on London's ICE Futures Europe exchange, the lowest close since June 4.

To contact the reporter on this story: Margot Habiby in Dallas at mhabiby@bloomberg.net; Robert Tuttle in New York at rtuttle@bloomberg.net.

Last Updated: July 29, 2008 15:45 EDT