World oil demand will contract by far more than previously expected in 2009 due to extreme weakness in the global economy, the International Energy Agency (IEA) said on Wednesday.

Demand is expected to fall by 980,000 barrels per day (bpd) in 2009 to 84.7 million bpd, the agency said in its monthly market report. The IEA's forecast last month was for demand to contract by 500,000 bpd this year.

The forecast adds to evidence that the financial crisis is sharply eroding fuel use. The IEA, which advises 28 industrialized countries, said the latest reduction to demand may not be the last. "The bottom line is that 2009 looks like a pretty weak year," David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.

"It's far too early to say if this is the end of the downward demand revisions because the financial and economic spillover is still unfolding. We're hostage to any further weakening in the overall economy."

World oil demand is now expected to average 1.4 million bpd less than it did in 2007, before crude's price spike and the slowdown in the global economy started to cut demand.

The IEA said it was revising its oil demand forecast lower after the International Monetary Fund sharply cut its estimate for global GDP growth in 2009 to just 0.5 percent.

"The continued -- and dramatic -- revisions of the past few months underscore the extreme weakness of the global economy," the IEA said. "The slowdown in industrial activity and consumption is the unavoidable sequel to the financial meltdown."

SUPPLY IMPACT

Oil prices pared gains after the IEA report was issued. U.S. crude was up 28 cents at $37.83 a barrel as of 0945 GMT.

The IEA also cautioned that future oil supply growth has come under threat from the collapse in prices, with decline rates in mature oilfields likely to accelerate if oil remains at $40 a barrel. "Hand in hand with the downward revisions in demand is the impact on supply," said Fyfe at the IEA. "The trend now is that downside demand revisions are being matched on the supply side."

Source: http://www.reuters.com/article/reutersC … ZC20090211