Oil falls below $114 as dollar surges

By Alex Lawler

LONDON (Reuters) - Oil fell by more than $1 a barrel to below $114 on Tuesday as the U.S. dollar strengthened, countering concern that Hurricane Gustav could threaten oil installations in the Gulf of Mexico.

The dollar hit a six-month high against the euro on Tuesday after weak German data highlighted a flagging euro zone economy. Dollar strength can limit the appeal of oil and commodities as an inflation hedge.

"The dollar is going to be the main trading input until we have a more definite path on Gustav," said Olivier Jakob, oil analyst at Petromatrix in Zug, Switzerland.

U.S. crude fell $1.71 to $113.40 a barrel by 0940 GMT, having dropped as far as $113.15 earlier in the session. London Brent crude was down $1.47 at $112.56.

Tropical Storm Gustav reached hurricane strength as it swirled through the central Caribbean and bore down on Haiti on Tuesday, the U.S. National Hurricane Center said.

A hurricane hunter aircraft reported the storm's top sustained winds were near 80 mph (130 kph) -- above hurricane strength of 74 mph (120 kph) -- as it approached southwest Haiti.

Oil has fallen sharply from a record high of $147.27 reached on July 11 in part due to evidence of a global slowdown in energy demand. It remains up about 15 percent so far this year.

Investors were also keeping an eye on tension between the West and Russia over Georgia. Russia's parliament urged the Kremlin on Monday to recognize two rebel regions of Georgia as independent states.

While the conflict in Georgia has led to some disruption in Azeri oil shipments through Georgia, analysts said the situation was having little influence on oil prices so far.

"Energy markets have not yet focused on what this latest escalation could mean for a potential disruption in energy supplies," said Edward Meir, analyst at MF Global, in a report.

"Until we get better clarity on this latter issue, we expect the price reverberations from this situation to be relatively contained."

(Additional reporting by Osamu Tsukimori and James Topham in Tokyo; editing by James Jukwey)