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European concerns lead to oil price drop

14 May 2010

It’s Europe’s turn to effectively control oil prices as the serious economic concerns of many of the European Union’s top countries has contributed to crude oil slipping to its lowest price in 3 months.

The price of benchmark crude oil set for June delivery fell $1.31 in late Asian trade on the New York Mercantile Exchange to a price of $73.10 at one point.

Just as oil prices reached $87 and seemed poised for push toward $100, the European economic situation prompted a quick fall in just one week’s time. The debt crisis in Europe that has affected major economies like Greece, Spain, and Portugal, combined with an increasingly stronger dollar has led to the oil drop.

The Euro fell to a near-term low at $1.2431 overnight Friday (May 14) before rebounding toward the $1.25 level. The Euro is sitting on very important long-term support in the $1.24-1.25 range. A significant break of this support could spark a swift move toward a one dollar Euro, also likely to lead to a steeper drop in oil prices.

The dollar, which when strong generally prompts a loss of value in oil prices, has been strong this week against most of its major global counterparts. The US appears to be on the path toward recovery while many parts of Europe and Asia are just encountering the worst periods in their own downturns.

The slumping European marketplace is also likely to lead to a drop in oil consumption by consumers and businesses in that region, in the same way that it has in the US during its challenges. This is also sure to impact oil prices as a drop in demand would help keep a lid on prices.

Equity markets have bounced around with volatility in the last week with the latest news that Greece was going to receive bailout assistance from Germany and the subsequent announcement that Moody’s would review Portugal’s situation for a possible lowering of its credit rating.

Oil prices have tended to take their lead from equities throughout most of the global economic downturn. Generally, expectations are that sour conditions diminish demand and recovery increases consumer and business demand. Oil prices had been following US sentiment higher until Europe’s crisis became more apparent.

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