Oil sinks in commodities sell-off

By Ikuko Kao

LONDON (Reuters) - Oil dropped from a record high on Monday as a part of wider commodity sell-off sparked by growing concern over the health of the world's largest economy.

U.S. crude was trading at $106.87 by 1:59 p.m., down $3.34 from the previous close. Earlier on Monday, it hit a new record of $111.80 and then fell to a session low of $105.11.

Gold struck a record of $1,030.80 an ounce before falling to a low of $999.80. "This market is vulnerable. Hedge funds and speculators have gotten ahead of the market," said Stephen Schork, editor of The Schork Report.

Crude oil prices had risen by about 16 percent so far this year, driven in part by the weakness of the U.S. dollar, which makes raw materials priced in dollars relatively cheap, and as fund-managers seek a hedge against inflation.

But analysts say the dollar-trading play could be running out of steam and they are also concerned U.S. economic weakness could suck in other economies and undermine demand for commodities.

The dollar slid to all-time lows across the board on Monday after JPMorgan Chase & Co agreed to buy rival investment bank Bear Stearns for a rock-bottom price.

At the same time, the U.S. Federal Reserve expanded lending to securities firms for the first time since the Great Depression in an attempt to shore up confidence.

Ministers of the Organization of the Petroleum Exporting Countries have repeatedly said high oil prices are not related to fundamentals, but are the result of speculation and the U.S. dollar's fall.