And this is baffling!

Prices have been in harmonic motion for weeks, swinging to and fro within a narrow band, over all these days and weeks. Oil prices dropped Friday as investors felt that Europe needed to tighten its belt for years to work through a credit crisis and factory production stalled in Japan. A global economic meltdown is just around the corner, some are now beginning to insist.

Benchmark crude fell 64 cents to end the day at $93.32 per barrel in New York. Brent crude, which is used to price foreign oil, lost $2.17 to finish at $109.91 per barrel in London.

Earlier on Thursday markets had soared after euro zone leaders hammered out an agreement to avoid default, and the emerging economic news from the US soothed too the fears of another recession.

And only days before, mid last week, oil was trading near its highest in 12 weeks in New York. There was news that the world’s second largest economy, China is about to initiate a series of “stimulative policies” to boost the economy. And this was music to the ears of the global economic managers.

Chinese Premier Wen Jiabao announced that the Chinese economic policy was to be fine-tuned, as needed and required in the situation. The industry ministry separately underlined it was studying “stimulative policies” for smaller companies.

Chinese officials will make policy adjustments at a “suitable time and by an appropriate degree,” Wen said in a statement, while the Ministry of Industry and Information Technology and other government agencies will work to help small businesses facing difficulties, a separate statement confirmed.

The current global economic scenario is definitely not favorable for a real Bull Run.

A number of factors are pointing to it. Libyan production, in the meantime, is getting on stream, slowly and surely, touching almost half a million barrels a day mark. Iraqi output is also closing in on 3 million bpd.

Yet despite all these, Brent is resiliently and stubbornly above the $100 mark. From a macro viewpoint, such continued support for oil doesn’t appear to make sense given the number of predictions that the world is on the brink of another recession, tipped over the edge by a volatile euro zone.

What is then holding the prices from sliding further ... and further?

According to Bank of America Merrill Lynch, the extra culprits on top of Libya’s lower output are North Sea maintenance and pipeline attacks in Nigeria.

Analysts are also referring to medium term tightness in the seaborne crude as one of the prime reasons for the tightness. Merrill Lynch analysts are referring to “a string of supply shocks affecting Libyan, North Sea and Nigerian light sweet barrels. Angola, a recent addition to the OPEC, has also not been producing anywhere near the 1.85 million bpd it pumped last year, with technical problems at some fields.

And Adam Sieminski of Deutsche Bank also mentions “slower than expected ramp-up of new production and unplanned outages” from non-OPEC producers.

There is a similar picture in America, where stockpiles of its benchmark WTI crude are remarkably low. And most agree that this level of stockpile has been a function of lower imports rather than increased consumption.

Another streak also seems in play. Data on oil speculation shows that more traders are betting on higher prices. At the end of last week, data from the US Commodities and Futures Trading Commission (CFTC) showed an increase in long positions in oil futures.

Rowena Mason while writing in the Telegraph attributes this firmness and resilience in the market to the changing fortunes of the European debt crisis, underlining that the oil market was still holding out for a solution to Europe’s debt woes.

Commerzbank appears to be in line with the prognosis, underlining the markets depended on the package to resolve the European crisis: “We still see the potential for disappointment if the big (European) push (to resolve the debt crisis) does not succeed.”

Markets could be in for turmoil if the initiative to resolve the debt crisis fails. And the fate of the oil markets too seem wedded — for now — to the European debt crisis — or the resolution of it — at least for the moment.

And in some senses, the markets are at a crossroads. It is a catch-22 situation. Ole Hanson, strategist at Saxo Bank, thinks that the market is now at a crunch point, ready to go either way. “WTI and Brent crude also reached but failed to breach important resistance levels indicating that a prolonged period of range trading can be expected while we wait for further clues about the future demand situation.” If the global economic crisis spread further, the impact on the crude markets could be disastrous, most now agree.

And thus, in the meantime, markets continue to look at the overall global economic picture. Analysts are holding their breath on the emerging demand situation. A long-term collapse in demand could not be ruled out at this stage, especially if a full blown economic crisis overlaps the world. That could trigger a real market collapse, a free fall in oil and commodity markets, most now agree.

And interestingly the markets are not pricing this in — just yet!