With global financial markets in turmoil and fear and panic gripping the markets, where is the crude heading to?

As sentiments undergo a massive and rapid transformation, since July 11 to be exact when it touched the all time high of $147 a barrel, conflicting and contrasting signals could be seen on the global price radar. Most now agree the prices are in for a downward slide. The debate remains — to what extent?

Deutsche Bank recently reduced its fourth-quarter 2008 and first-quarter 2009 WTI price forecasts to $85/bbl. The price is forecast to average $90/bbl in second quarter 2009.

“We believe crude oil prices have further downside as the fallout of the financial crisis spreads into the real economy and ultimately global oil demand. Like gold, we also believe the oil price is trading rich relative to the US dollar, with the current euro/dollar rate suggesting an oil price nearer $80/bbl,” the report projected.

Over the last 2 years, 85 percent of the movement in the West Texas Intermediate oil price is explained by shifts in the value of the dollar, the report added. And there is a definite point in the argument. Recent fluctuations in the oil markets are reinforcing the inverse relationship between the dollar market value and the oil prices.

Deutsche Bank underlined that some other analysts are looking for oil to move as low as $50/bbl, a price last seen in early 2007.

Analyst Adam Sieminski says that although $50/bbl oil is not out of the realm of ‘reasonableness’ in view of recent history, it seems ‘unlikely’ in view of the consensus opinion that the Federal Reserve will cut interest rates when it meets later this month.

With energy demand expected to slow further in the coming months, brokerage Merrill Lynch also reduced its forecast for average West Texas Intermediate and Brent prices in 2009 to $90 a barrel, from $107.

It further added that crude oil prices could sink to $50 a barrel in the unlikely event of the whole world slumping into recession. “Should we enter a synchronous global recession, an unlikely event in our view, we still maintain our opinion that oil prices could fall further to $50 a barrel next year,” Merrill Lynch commodity strategists Francisco Blanch, Sabine Schels, Gustavo Soares and Michael Haase said. However, the report cautions that since the commodity super-cycle were still not over, crude prices could bounce back to $150 a barrel as the economy recovers and the cost of money increases, the report added.

Market fundamentals are weak — weaker than most could have anticipated even a few months earlier. With the Organization of the Petroleum Exporting Countries (OPEC) stressing all these last few turbulent months that supplies are at a comfortable level, its viewpoint seems to have finally carried the day.

Supply is not the issue — for now at least. Focus has shifted on demand. The issue of demand security, as often demanded by oil producers, is real. And if it is not provided, it could ultimately end up driving the crude markets berserk again, one cannot help underlining here. Right now oil demand is faltering the most in the United States and Europe, while demand growth is also slowing in China, the major consumption driver.

In Brazil and Russia, car sales have fallen. The US oil demand in July fell to the lowest level for the month in 11 years, with consumption 736,000 barrels per day less than previously estimated and down 1.335 million b/d from a year earlier, says the US Energy Information Administration.

The French oil company Total indicated in September that demand for its fuels in France had declined by 6 percent this year.

For the industrialized world — accounting for about 60 percent of global oil demand — consumption fell by 1.3 million barrels a day this year, the steepest since 1982, a Bernstein Research report underlined. “We may finally be reaching the point of negative demand,” the report said. JP Morgan’s oil analyst, Lawrence Eagles emphasized, “This is the weakest fundamental situation we’ve had since 2002.”

In the near term, the horizon is clear. Demand destruction has taken place. High oil prices and the melting global economy have taken twin toll on the global demand pattern.

However, the oil rich Middle East still seems showing positive consumption trends. Consequently supplies are slowing down.

With Saudi Arabia undertaking at the highest level to meet all the market needs, definitely it is now a case of not many takers in the market. Thus the OPEC oil supply fell in September, the first monthly decline since April, as violence in Nigeria cut output and Saudi Arabia, the top exporter, trimmed production, a Reuter’s survey confirmed.

Supply from the OPEC fell to 32.39 million b/d in September from 32.70 million b/d in August, the survey of oil firms, OPEC officials and analysts said.

The 12 members bound by output targets, all except Iraq, pumped 30.18 million b/d, down from 30.4 million b/d in August, but above their official output target of 29.67 million b/d, the survey found.

With ample supplies in the pipeline, the issue of demand security is turning out to be the crucial in the overall balance. And the answer to the question could have major implications for the billion dollar investments projects being undertaken and planned in this oil rich region.

In order to ensure smooth, stable and ample supplies in the medium to long term, so essential for the stability of the crude world, required investments in the energy sector are a must. However, given the nature and the scale of investments required, these cannot be undertaken, without some sort of demand security — the proverbial chicken or the egg first story.

Are the consumers ready to provide demand security? That is a big puzzle in the overall jigsaw and it’s now the consuming world’s turn to make the right move on the global energy chessboard so as to ensure a stable future of this civilization of ours — that continues to remain crude driven.

Whether one likes it or not, as per David Kirsch, of the Washington-based PFC Energy, the supply side “begins and ends with OPEC.”