Oil prices plummet on Greece, Portugal

NEW YORK (CNNMoney.com) -- Oil prices plunged over 2% after Greece and Portugal's debt downgrade fueled concerns that money problems could spread, threatening the fragile economic recovery and demand.

What prices are doing: Crude oil prices fell $1.76, or nearly 2.1%, to settle at $82.44 a barrel.

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The dip was the second in a row, following a recent run-up in prices fueled by strong earnings and economic data in the United States. Prices have fallen 0.8% in the past week, but risen about 70% from this time last year.

What's moving the market: Prices plummeted after Standard and Poor's, a credit rating agency, downgraded the sovereign debts of Portugal and Greece on Tuesday.

In the second downgrade in as many weeks, Greek debt was given a "junk" rating. Meanwhile Portugal's debt, which was given a two-notch downgrade, remained in investment grade territory.

The news sent U.S. stock markets sharply lower. And the dollar shot up more than 1.1% against the euro, as concerns that Greece's money problems could spill into other debt-laden European nations and stifle the fledgling economic recovery spread.

A stronger dollar makes crude, which is priced in the U.S. currency, more expensive for foreign investors. That tends to stifle demand and prices.

The negative tone overshadowed a better-than-expected consumer confidence reading from the Conference Board and a report showing first year-over-year increase in home prices since December 2006.

What analysts are saying: "We've been talking about Greece and Portugal as an unresolved dark cloud over oil for weeks," said Gianna Bern, president of Brookshire Advisory and Research, Inc.

"Today's news is a case in point that the whole eurozone is still unsettled," she said.

Crude prices have failed to break out of a $80 to $85 a barrel trading range, despite strong first-quarter earnings reports and economic news, and a run-up in the stock market. Typically, bullish market news would bolster oil prices as traders speculate that higher demand will follow.

Many analysts have called the recent downturn in prices a part of the seesaw trend in crude this year, which has been driven by swings from optimism to pessimism.

But Bern said the problems in the eurozone, coupled with still much higher-than-average crude supplies, could have a more lasting impact on prices.

"This is worse because the downgrades trigger a stronger dollar, which has an adverse affect on crude. But longer term, it calls into question the viability of the euro as currency," she said.

Looking ahead: The American Petroleum Institute was scheduled to report its inventory numbers late Tuesday, while a separate report from the Energy Information Administration was due out on Wednesday.

Analysts surveyed by Briefing.com forecast crude stocks to have risen by 1.4 million barrels and gasoline supplies to have increased by 500,000 barrels. Increased supply tends to drive prices lower.

Wednesday's Federal Reserve rate decision could also be a market mover.