Oil price falls to $113 on expected fall in demand

A rapidly cooling global economy and an increase in supply from Opec nations will see the price of oil ease next year.

In its latest monthly market report, the International Energy Agency looks to a "potential easing in fundamentals for the second half of 2008 and into 2009, before a renewed tightening thereafter", a trend that seemed to be foreshadowed in oil trading yesterday. The price of a barrel of crude dropped again – US crude settled down $1.44 at $113.01 a barrel, almost $35 a barrel below the record high of $147.27 recorded in July. For now at least, fears of a $250 barrel can be set aside.

The IEA saw the demand for oil in the United States and Europe as likely to be soft. "High prices are beginning to play a central role in determining demand, at least for the OECD countries," it said. The IEA also suggests that the long-term trend towards more energy efficient economies in the west will be accelerated. "Even if retail prices ease, it seems unlikely that motorists who have purchased smaller cars will revert to gas-guzzling vehicles."

Hopeful signs for an early end to hostilities in Georgia have also helped ease nerves, as has the rise of the dollar, in which currency oil has been traditionally priced. Demand growth in emerging countries, however, remains strong, with Chinese consumption rising above 8 million barrels per day for the first time in June, at 8.3 million barrels per day. On the supply side, production, especially from Opec, has jumped. In July, the cartel pumped about 32.8 million barrels per day, a record high, thanks to increases in supply from Saudi Arabia and Iran.

The IEA sees more to come. "There are encouraging signs for crude capacity, with summer field start-ups in Nigeria and Angola, and a reportedly imminent capacity boost in Saudi Arabia, which could raise Opec spare capacity from July's very low level of 1.5 million barrels per day," the IEA said. "Is this really the tipping point for the market that some pundits have identified?"

But the IEA warned that even at current levels, oil remains expensive, and that even if "any fall from recent peaks is welcome," prices close to "$115-$120 a barrel remains high by any measure, sustaining inflationary concerns, not least in developing importer countries".

Opec will meet to review its production levels in Vienna on 9 September.