This is a syndicated post, which originally appeared at Money Morning. View original post.
The uncertainty looming around worldwide economies sent oil prices sinking below $90 a barrel yesterday (Wednesday), a level not seen since October of last year.
Benchmark crude slid $1.95 Wednesday to finish the day at $89.90 per barrel.
The decline came on the heels of several weeks of slipping oil, sparked by a plethora of less than stellar economic reports. The concerning data mostly involved Europe’s ongoing sovereign debt saga.
Oil gained 0.5% in early afternoon New York trading Thursday, but the reasons for the rally were unclear.
“You don’t know if this is just a short-covering rally or the start of a more significant rally,” Andy Lebow, an oil analyst with Jefferies, told The Wall Street Journal. Lebow said that progress in the talks between Iran and Western powers about Tehran’s nuclear ambitions could have spurred Thursday’s price reversal.
If the gain isn’t maintained, however, prices could head closer to $85 a barrel.
Europe and the Oil Prices Slide
Contributing to Wednesday’s decline were mounting concerns about the strength of the global economy.
European finance ministers gathered for an ad-hoc meeting in Brussels Wednesday night to discuss measures to prop up stagnant economic growth in the region and to confer about the dire situation in Greece.
Red flags have been raised warning of a “severe recession” in the 17 nations that use the euro, which Greece is threatening to leave.
Also weighing on oil Wednesday was the latest government report that showed U.S. stores swelled last week by 900,000 barrels to 382.5 million barrels. That was the highest level since 1990 and above forecast of supply growth of 750,000.
In May alone, oil has declined more than 15% and currently sits at its lowest level since Oct. 21.
Gas prices have dropped by some 26 cents since peaking in early April. The national average is currently $3.68 a gallon.
If the price trend continues then gasoline could dip as low as $3.50 by the Fourth of July. Meanwhile, the average price of diesel fuel is below $4 for the first time since February.
“This is a good thing for consumers, that’s for sure,” oil analyst Andrew Lipow told the Associated Press.
Oil Price Decline Temporary
Don’t get too comfortable, however, with lower oil and gas prices.
Money Morning’s Global Energy Strategist Dr. Kent Moors sees the slide as temporary.
He wrote just a week ago, “We are seeing a short-term pullback in prices as concerns over falling demand levels parallel the European confusion.”
Moors wrote that the U.S. economy is “largely insulating itself” from what happens overseas, and that oil demand continues to be robust in the areas around the world that actually determine the pricing level.
“The current situation tends to benefit the value of the dollar against the euro,” said Moors about Europe’s debt debacle. “With virtually all international oil trades in dollars, that does mean prices may stabilize for a time. But it also means the concentrated asset wealth in oil transactions will increase.”
“And despite the events in Europe, the ultimate value of oil contracts will increase as well-especially in a market where the essential rise in demand is occurring in those regions of the world not directly impacted by the Eurozone problems,” Dr. Moors continued.
Other variables looming that could trigger an oil prices spike include Iran resuming its standoff with the West, and the possibility that OPEC could cut production if oil falls too low. Then there is the U.S. hurricane season which starts June 1; major storms are always a worry to oil rigs in the Gulf.
Related Articles and News:
- Money Morning:
Oil Prices and the Death of Greece
- Money Morning: The End of the Beginning?
- Money Morning: Oil and Gasoline: A Tale of Two Prices
- Associated Press: Oil drops below $90 for 1st time since October
- The Wall Street Journal: Crude Rises On Euro Rebound, Iran Talks