IEA slashes world oil demand growth forecasts

By Alex Lawler and David Sheppard

LONDON (Reuters) - The International Energy Agency (IEA) on Thursday slashed its global oil demand growth forecasts in response to mounting evidence the world economy is far weaker than previously thought.

Already this year demand has grown at the slowest rate in a generation and next year will expand by only 350,000 barrels per day (bpd) -- down 340,000 bpd from its prediction in last month's report.

The revision follows the release of weaker economic forecasts by the International Monetary Fund, which said on November 6 that the world's developed economies are headed for the first full-year contraction since World War II.

"This is very much related to the dramatic worsening of global economic conditions over the past few weeks as a result of the ongoing financial crisis," the IEA said in its monthly report.

The adviser to 28 industrialized countries also chopped its 2008 oil demand growth estimate by 320,000 bpd to a marginal 120,000 bpd.

World oil demand is now expected to average 86.2 million bpd in 2008, while in 2009 it is expected to expand to 86.5 million bpd.

As demand slows, oil inventories in Organization for Economic Cooperation and Development (OECD) countries are rising. Stocks at the end of September were equivalent to 55 days of forward cover -- 2.2 days above the 2003-2007 average.

Preliminary October figures show a rebound of 51 million barrels, potentially raising stock cover to 56 days, it said.

While demand growth is now expected to be minimal over the next two years, a fall in investment in the oil sector has raised fears of tight global supplies when the economy recovers, causing prices to soar.

"The current credit squeeze is not just a demand side issue for oil," the IEA said.

"Slowing oil sector investment in 2009 sows the seeds of a sharp tightening in market fundamentals if major projects are delayed, the impact being felt three to five years hence after economic recovery regains a foothold."