Oil Prices Likely to Keep Falling on Worries Over Europe

Oil falls below $70
Oil falls below $70

In the last two days, oil prices have tumbled below $70 after trading at $89.77 just two weeks ago. Light sweet crude for June delivery, the active contract which expires today, has slipped $2.12, or over 3%, to $67.75 a barrel. The July contract, which will become active on Friday, has fallen about 3.13% to $70.21 per barrel.

This extraordinary reverse occurs just weeks after several brokerage houses said it would go over $95 in 2010. There's now a much greater chance that crude will sink to $60 than climb back toward $90.

Not About the Fundamentals

The stock of oil in the U.S. was up last week to 362 million barrels -- less than analyst estimates. But supply and demand and the change in the price of the dollar, fundamentals that usually drive crude prices, are hardly part of the equation right now.

"The recent fall in oil prices is linked to uncertainty about the global economy, not crude supply, and there is no role for OPEC to play at this stage, Algerian Energy Minister Chakib Khelil said on Wednesday," according to Reuters.

Oil may not trade on fundamentals for weeks or even months. Most of the worries weighing on oil stem from the European debt crisis. The public debt of Greece, Spain, and Portugal have caused rising concern. European nations and the IMF have put together a fund of almost $1 trillion to aid regional nations and undermine speculators who have lost faith in the euro, but the action hasn't helped. The euro is heading toward $1.10, which may experts think is its true market value under the current circumstances.

The Impact of Europe's Troubles

Greece, Portugal, and Spain have begun programs to increase taxes and cut government expenses to bring down their deficits, but some economists view these moves as regressive. High taxes may slow consumer and business spending, driving the three economies into severe recessions.

The economic trouble in Europe may impact China and the U.S. Each relies on exports to Europe to aid growth. Each would suffer financial damage if Europe falls into a prolonged period of economic trouble. GDP stagnation in these two huge economies would almost certainly sap the demand for crude.

Oil prices have shrugged off BP's Deepwater Horizon oil spill and potential curbs in drilling off the U.S. coast. Normally events like this would cause another jump in oil prices. Instead, the catastrophe has barely cause a ripple.