Oil fell over $2 toward $34 a barrel on Monday after Ukraine and Russia signed a 10-year gas deal clearing the path for the recommencement of supplies to a cold Europe.

Execution of a ceasefire between Hamas in Gaza and Israel also eased oil supply concerns.

A weakening global economy could erode oil demand further. Prices have fallen 73 percent since the July highs on investor concerns that falling consumer spending and considerable job layoffs in the U.S. are deteriorating global oil consumption.

Widespread fears of lower demand are dragging the price of oil lower and lower.

We have seen oil collapse by more than $110 a barrel since reaching a record high of over $147 a barrel last summer.

Oil’s downward spiral is also pulling down gasoline prices, giving consumers a break at the pump just five months after gas prices peaked at $4.11 a gallon.

The Organization of Petroleum Exporting Countries (OPEC) has cut production three times since September, trying to stem falling oil prices.

Recently, both the OPEC cartel and the International Energy Agency (IEA) lowered their demand forecasts for 2009.

OPEC, whose member nations together pump about 40 percent of world crude, is considering further production cuts if oil prices continue to plummet.

OPEC thinks it will take time for output cuts to stabilize prices, but there’s some doubt about the relevance of OPEC and their ability to manipulate oil prices after all. In general they are not very successful at controlling oil prices.

OPEC establishes quotas on the production of petroleum, but these agreements are constantly violated. All this cheating increases the supply of oil and floods the market, which reduces the price. The temptation for cheating within OPEC is strong so only occasionally has it been an effective cartel.

Now that crude oil prices have retreated to almost $34 a barrel from a high of $147, the question everybody is asking is how much further can they drop?

We could be in a global recession similar to the one we had after the bursting of the technology bubble. Oil prices at that time fell briefly below $20 a barrel in late 2001 before recovering.

We may have to see that crude inventories have stopped rising or have a sustained rally in the stock market before oil prices actually bottom out. The focus of the market is almost purely on the demand side and there are signs that demand is weakening even further.

Oil prices could fall as low as $25 per barrel this year. Then there could be choppy, sideways action in oil prices. There could be room for oil prices to fall much further.

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