Just wondering......
What the model year of your Mustang?
What happens if you ground the wire to the oil sending unit? The gauge should read normal.
There are several grounds from the cluster to a ground point behind the center console. This ground is shared by several sub-systems including the radio. Sometimes this ground is messed up during a radio install.
If this is a 1999+ Model year the problem could be a bad PC foil trace on the cluster that often can be repaired. This forum won't let me post outside links. Try Google search on Ford cluster PC foil trace repair.