World oil demand will rise much less than expected in 2008 because of slower economic growth in the United States and other industrialized countries, the International Energy Agency (IEA) said on Friday.
The IEA, adviser to industrialized countries, also pointed to a drop in oil inventories and said oil supply outside the Organization of the Petroleum Exporting Countries (OPEC) was continuing to fall short of expectations.
Global oil consumption will rise by 1.27 million barrels per day (bpd) in 2008, 460,000 bpd less than the previous forecast, said the Paris-based agency in its monthly Oil Market Report.
The assessment follows the latest outlook from the International Monetary Fund (IMF), which this week issued lower economic growth forecasts, and the impact of record-high oil prices above $110 a barrel.
"The latest GDP projections from the IMF suggest less robust oil demand growth in the coming months," the IEA said. "This report projects April and May oil balances tipping towards a supply surplus."
Lower demand in members of the Organization for Economic Co-operation and Development (OECD) accounted for the bulk of the revision.
The IEA cut expected OECD demand this year by 320,000 bpd to 48.9 million bpd.
The IMF trimmed its 2008 economic growth forecast for top oil consumer the United States to 0.5 percent from 1.5 percent.
China, the world's second largest oil consumer, was also predicted to use less oil than expected.
The IEA lowered its estimate for 2008 demand in China by 70,000 bpd, partly because of weather-related effects in the first quarter.
Demand for oil, by contrast with other energy forms is regarded as inelastic because of a lack of viable alternatives for transport, but record high prices have played a part in changing consumption, especially in the United States.
"A bit of demand shift is going on there, which is related to price ... The price has probably a more significant impact on consumers who are feeling the pinch," said Lawrence Eagles, head of the IEA's Oil Industry and Markets division.
"This is happening at the margins in a number of countries."
Oil prices edged higher after the IEA report was released.
U.S. crude, which hit a record high of $112.21 this week, was up 44 cents at $110.55.
The demand reduction brings the IEA's global demand forecast closer to that of OPEC, which expects growth of 1.2 million bpd this year.
But the IEA said weaker demand might not translate into lower oil prices given supply risks in countries such as Nigeria and Iraq.
Oil rose in the second half of 2007 even though inventories were also climbing, it noted.
"That perhaps explains why, in the face of weakening economic growth, prices continue to remain high: there is concern that projected stockbuilds may not materialize, or may not be high enough."
The IEA trimmed its forecast for oil supply outside OPEC this year and said oil inventories fell in February and preliminary figures showed only a small increase in March.
Commercial oil inventories in the OECD fell by 49 million barrels in February and rose by just 6.3 million barrels in March.
That leaves stockpiles equaling 53.3 days of forward demand at the end of February, below levels at the same time last year.