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Can Greece and China Drop Oil Back to $50?

24/7 Wall St. logo 24/7 Wall St. 29-06-2015 Douglas A. McIntyre
186723229 © Thinkstock 186723229

News of a market correction in China and a possible exit of Greece from the eurozone after a series of defaults pressured oil by over 2% to $58.37. A series of future global financial and economic problems could push crude back to $50, where it traded just four months ago.

Among the theories about the exit of Greece is that it will prove that the eurozone was never meant to be, if the diversity of the economic strength of its members is the best measure. Austerity has burdened other countries, with Spain being the first among them. In the first quarter, its unemployment rate was 21.3%, which is not much better than Greece's. The larger problem is that youth unemployment is nearly half of all workers in the group under age 25. Spain's economic future a decade from now will depend on how many of those people get jobs. For now, the answer is not very many. And austerity with little stimulus makes that worse.

China's rapidly falling stock market, which has gone into a correction, may be caused primarily by a rush of individual and inexperienced investors into the market. The fundamentals of the Chinese economy and the future of earnings among China's largest companies should put a floor under the drop. However, there is mounting evidence that gross domestic product (GDP) in China might be well under 7%, which might qualify as a recession, based on China's past over-10%-a year growth. And China company earnings are based on Chinese business sentiment and production. Trade numbers show that the lifeblood of overseas trade has dwindled.

While the economy in the European Union remains crippled, with GDP increases of barely 2%, and developing nations led by China have begun a period of slower growth, marked by both International Monetary Fund and World Bank forecasts, the United States is left to carry much of the global weight of the broader economy on its shoulders. Recent economic signals show consumer sentiment rising and unemployment falling. Home prices have continued to rise, albeit slowly.

Because of OPEC's decision to continue oil production at current levels, supply will remain plentiful. China and Europe, primarily, could create a perfect storm to drive crude downward.

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