Oil fell on Friday to cap a frenzied trading week that sliced prices by a record of more than $16 a barrel on demand worries and a move by investors to slash commodities exposures.

Oil bounced up early, then began to erase gains as the dollar rose. Crude turned negative late, extending Thursday's shock-inducing collapse, when Brent fell by as much as $12, a record, in a furious, high-volume session that saw wave after wave of selling as key technical levels were broken.

Selling pressure on oil and other commodities came on several fronts throughout the week. Investors weighed factors from the death of Osama bin Laden to the impact of higher fuel and commodity costs on consumer nation economies to the monetary policy in major economies.

Brent crude fell $1.67 to settle $109.13 a barrel in heavy trade, with volumes twice the 30-day moving average. The contract tumbled $16.76 a barrel for the week, marking the largest weekly decline ever in dollar terms.

U.S. crude futures settled down $2.62 to $97.18 a barrel, after trading as high as $102.38 following supportive U.S. jobs data. Volumes were 70 percent over the 30-day moving average. U.S. crude ended down $16.75 for the week, the biggest weekly drop since the contract began trading in 1983.

LOOSE MONEY, SHAKY DEMAND

Oil got early support from U.S. Labor Department data showing private employers added jobs in April at the fastest pace in five years. But then the rising dollar again dragged prices down.

The euro fell to its lowest in more than two weeks and headed for its biggest weekly decline against the dollar since January. The move followed a German news report, later denied, suggested Greece had raised the possibility of leaving the euro zone.

Payrolls were bullish initially, but the oil market is worried about demand growth, said Bill O'Grady, Chief Investment Strategist Confluence Investment Management in St. Louis.

If Greece were to leave, which is not easy to do, the European banking system would be in great trouble, damaging the economy and oil demand.

Concerns about the end of the second U.S. quantitative easing program in June also weighed on prices. The program, in which the Federal Reserve purchased U.S. Treasury debt, flooded markets with cash and helped drive up crude prices,

Investors also were watching moves by other big oil consumers. India's central bank raised rates more than expected on Tuesday, and expectations No. 2 oil consumer China could take similar actions hit crude on Wednesday.

FURTHER TO FALL?

Thursday's sell off saw U.S. oil futures set a record high for open interest, which analysts said could suggest even more downside pressure could be mounting on crude.

It suggests that the investors are reversing course and that the new shorts were big enough to offset the longs and also would suggest there's more downside to go, said O'Grady.

Oil volatility measured by the Chicago Board Option Exchange's index initially cooled a day after the biggest one-day rise since it began in 2009. Bu the index closed only slightly lower at 41 percent. It was trading at around 30 percent just a week ago.

Oil prices had rocketed to levels not seen since the record spike in 2008, driven by supply disruptions in Libya and loose U.S. monetary policy. Brent hit a high of $127 a barrel and U.S. crude surged over $114.

Goldman Sachs, which in April predicted this week's major correction in oil prices, on Friday said oil could surpass its recent highs by 2012 as global oil supplies keep getting tighter.

It is important to emphasize that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year, Goldman Sachs' analysts said in a research note.

We continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market.

(Reporting by Gene Ramos, Robert Gibbons, Matthew Robinson in New York; Jessica Donati-Bourne in London and Francis Kan in Singapore; Editing by David Gregorio)

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