updated 11/13/2006 1:25:23 PM ET 2006-11-13T18:25:23

World oil markets will tighten in the fourth quarter as OPEC cuts supply and peak winter demand kicks in, the International Energy Agency said on Friday.

The world's thirst for oil will rise 2.4 million barrels per day (barrels per day) in the last three months of this year from the third quarter, the Paris-based agency said in its Oil Market Report. That is 400,000 barrels per day higher than the agency forecast last month.

"Demand growth in the fourth quarter is expected to be exceptionally strong," said Lawrence Eagles, head of the IEA's Oil Industry and Markets division.

"And that is not even allowing for a cold winter. If we see a cold winter it will be even stronger."

Cheaper prices drove higher demand for transport fuels in the United States, Eagles said. The price of oil has fallen by nearly a quarter to just $60.60 on Friday from its July peak of $78.40 a barrel. Despite slightly weaker than expected demand from China, growth remained strong due to rapid economic expansion, the IEA said.

"The structural support of Chinese consumption, economic growth, is still strong and likely to remain so, at least in the short term," the IEA said said in its monthly report.

While demand was expected to rise, OPEC is pumping less.

October output from the Organization of the Petroleum Exporting Countries was 29.4 million barrels per day, down 335,000 barrels per day from September, the IEA said.

The fall came before OPEC's agreement to cut output by 1.2 million took effect on Nov. 1.

That leaves OPEC pumping 400,000 barrels per day below the requirement for its crude during the fourth quarter, the IEA said, meaning refiners will have to drain oil from inventories.

"Even before the OPEC cuts were in place, the group was producing well below the call for its oil in the fourth quarter," said Eagles.

"We would expect to see stock falls in winter anyway, but the OPEC cut doesn't help the situation."

Lower production from OPEC, which supplies more than a third of the world's oil, lifted the group's spare capacity to 2.15 million barrels per day in October, up 210,000 barrels per day on the previous month.

Demand for OPEC oil will drop 500,000 barrels per day in 2007 to 28.3 million barrels per day, as supplies increase from rival producers, the energy adviser to 26 industrialised nations said.

This year, however, non-OPEC producers have failed to live up to expectations. The IEA cut its 2006 non-OPEC supply growth forecast by 90,000 barrels per day to 900,000 barrels per day.

Tighter fundamentals in the fourth quarter will help reverse the biggest third quarter stock build for 15 years, the agency said. Oil inventories in the OECD rose by 1.15 million barrels per day during the third quarter, it said.

The agency's forecast for global oil demand growth next year was steady at 1.45 million barrels per day, but it cut the outlook for this year by 130,000 barrels per day to 900,000 barrels per day.

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