OPEC sharply revised down its forecast for world oil demand for this year and expected consumption would remain weak in 2012, citing on Monday waning economic growth in key industrialized nations and a weak U.S. driving season.
The 12-nation group that supplies about a third of the world's crude oil slashed its global oil demand forecast by 150,000 barrels per day for 2011 and by 40,000 barrels per day for 2012, saying "turbulence in world economic recovery has resulted in considerable uncertainty for demand growth next year."
It also lowered its estimate for crude produced by OPEC nations by about 100,000 barrels per day in 2011.
"Uncertainties in the oil market are increasing at a time when the recovery of the global economy is losing momentum and is becoming less evident," OPEC said in its September monthly oil market report. "Over recent months, a deceleration of economic growth was observed in almost every major economy."
Oil prices have swung sharply over the past few weeks, affected by volatility in the equities markets. Investors and economists are increasingly worried that the global economy is headed back into a recession amid staggering debt woes in Europe and a decision by credit ratings firm Standard & Poor's to cut the U.S. debt rating from its top tier level.
The concerns about an economic slowdown have been coupled with uncertainty over supply, as output from OPEC member Libya largely stopped because of its civil war, which has now dragged on for over five months.
Worries about Libyan crude supplies helped propel the Brent futures contract well above $120 per barrels in the summer earlier, keeping it at a more than $20 premium to its U.S.-based futures contract, West Texas Intermediate.
To cool prices, countries belonging to the Paris-based International Energy Agency released 60 million barrels of crude into the market to offset tight supplies over the summer. But the IEA's new chief said last week that she does not foresee the need for an additional release of crude from strategic reserves.
On Monday, WTI was trading down to near $85 per barrel on electronic trading on the New York Mercantile Exchange while Brent on the ICE Futures exchange was down over $2 per barrel at a little over $110 per barrel.
Libya's expected return to the oil market contributed to OPEC's lowered forecast. The North African nation that sits atop Africa's largest proven crude reserves began production at one of its fields in the east, the acting prime minister said on Sunday without providing further details. Before the civil war, Libya produced about 1.6 million barrels per day, a level analysts say it could take about a year to return to.
OPEC has left its members' output quotas unchanged for over two years, declining to raise production targets during its last meeting in Vienna in June. But with concerns building about a new global recession, key OPEC members Saudi Arabia and Kuwait unilaterally boosted their exports as a way to cool overheated prices.
The producer group is slated to meet again in December and member states have given conflicting messages about whether they could move to revise their output figures at that gathering.
In its latest report, OPEC said that the U.S. summer driving season fell short of its peak, dropping 2 percent year-to date, with the country's economic troubles contributing "to this devastating performance."
"The setback in the OECD economy has been affecting world oil consumption since the onset of the financial crisis," OPEC said, adding that the projected downside risks about which it cautioned are already materializing.
While demand remains strong in major developing nations, like China and India, OPEC said that even there demand was waning slightly.
Overall, it forecast world oil demand for 2011 at 87.99 million barrels per day, down from its August estimate of 88.14 million barrels per day. Oil demand for 2012 was forecast at 89.26 million barrels per day.
"Next year's oil demand forecast is based on assumptions such as higher GDP, higher retail petroleum product prices, a strong Chinese economy and uncertainty in total world economy in 2012," OPEC said. "While the forecast for 2012 implies two scenarios, the lower direction is more likely. A worse-than-expected performance of the US economy might drag down world oil demand growth" by 200,000 barrels per day."