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Oil falls towards $35 after IEA demand report

The IEA said in its monthly oil report that world oil demand would contract as the economic slowdown eroded consumption. The agency revised its estimate for 2009 demand down by 940,000 barrels per day (bpd) to 85.3 million bpd—a fall of more than 500,000 bpd year-on-year.

U.S. light crude for February delivery was down 30 cents at $35.10 a barrel by 0945 GMT, after hitting a low of $34.77. The contract, which expires on Tuesday, touched a low of $33.20 on Thursday, the weakest in nearly a month.

London Brent crude for March was up 7 cents at $47.75, maintaining an unusual premium to the U.S. benchmark due to the disruption of Russian gas supplies to Europe and growing U.S. stockpiles.

The price of oil for delivery in February has fallen about 14 percent so far this week, as a string of dismal figures from major economies stung investor confidence and portended further weakness in oil demand in months ahead.

“Global oil demand is reducing at an alarming rate,” said Rob Laughlin, senior oil analyst at MF Global in London.

“This latest report from the IEA is another warning shot across the bows to OPEC that supply is still outpacing demand and the situation is getting worse seemingly day by day.”

“Whilst OPEC is making an effort to adhere to quotas, the clear picture shows that another cut is required and soon.”

Chinese growth slowing

In its report, the IEA said Chinese oil demand would grow at its slowest rate in eight years, rising just 90,000 bpd in 2009 as its GDP growth slows to 6.5 percent.

The gloomy global economic outlook has also prompted OPEC to forecast a fall of 180,000 barrels per day (bpd) in world oil demand this year.

The producer group, which has already cut 4.2 million bpd in supply from the world market since September, could quickly deepen output cuts if needed, OPEC President Botelho de Vasconcelos said on Thursday.

Investors will be keenly watching U.S. CPI data, due later on Friday, which is expected to show a drop of 0.9 percent in December, while a preliminary index of January consumer sentiment in January is expected to erode to 59.0 from 60.1 in December.

They are also nervously awaiting earnings results from Bank of America and Citigroup later on Friday, with both expected to post more losses.

The financial crisis has forced a growing number of major economies into recession. Energy consumption has waned sharply, prompting oil prices to tumble by more than $110 since a record peak in July.

Analysts said the glut in global crude supplies would continue to cap oil prices for the rest of this year.

“With between one-half and one day of global demand on the water in floating storage, OPEC would have to tighten the market by one-half to 1 million bpd below current demand levels for an entire quarter to get rid of the surplus,” JP Morgan said in a research note led by Lawrence Eagles.