RIYADH, Oct 4: Fears of global economic meltdown now under the total control of the oil markets. Crude prices continue to slump on falling demand - with US oil demand in July falling to the lowest level in 11 years - and real concerns that even the $700 billion bailout to sustain the ailing US financial sector, would not be enough to arrest the declining oil demand.

”Oil traded for the last five years on fear of supply interruptions. It is now trading on fear of economic collapse,” says James Williams of WTRG Economics.

The outlook for oil demand is weakening, shifting the sentiment of oil markets from bullish to bearish, asserts the London based Centre for Global Energy Studies in its September monthly oil report.

The world oil demand, at its weakest level in at least five years, is now likely to push the oil prices downward for the rest of the year. The US and European demand is now down from a year ago, and some consider it only a matter of time before the contagion spreads to fast-growing and emerging economies.

Oil consumption in the OECD is down 1 million bpd year-on-year and Beijing’s contribution to oil demand growth is set to falter. Sinopec is reportedly planning to cut crude oil imports by 8-10 per cent (around 240,000 bpd) until the end of the year in order to drawdown stocks built up ahead of the Olympic Games.

Should the turmoil in financial markets widen, as many believe it would, demand for Asia’s merchandise exports will be hit, undermining the robust economic growth that has spurred the region’s oil consumption.

In the week ended Sept 19, total U.S. oil demand slumped 1.4 per cent to 18.78 million barrels a day, the lowest since March 8, 2002, EIA data shows. The current demand is on pace to be the lowest in any month since Dec 2001.

MasterCard’s SpendingPulse report, which tracks gasoline sales, said demand in the week ended Sept 19 plunged 5.7 per cent week to week and was 7.6 per cent below a year ago, at the lowest level since mid-April 2007. It seems oil producers can no longer count on fast-growing developing economies to make up for lost US and European demand.

According to some estimates earlier in the year, Chinese demand was growing at about the same pace the US demand was dropping but not any more. In August, China was able to compensate for only half the decline in the US, says Paul Ting, of the U.S.-based consultancy Paul Ting Energy Vision LLC.

A report by Petrologistics said last week that Opec oil supply fell by 800,000 barrels per day in September due to lower output from members, including Saudi Arabia and Iran.

However, the recent drop in Opec supplies is giving rise to another debate within the fraternity – what price is it trying to defend. Most now argue that it was ready to defend a price of something around $100 a barrel.

CGES said that while Saudi Arabia will not rush to cut production in defence of a $100 price, it may begin to act should oil prices fall further.