IEA sees first two-year oil demand fall in 26 years

The Paris-based energy group, in its monthly report, slashed its estimate of 2009 demand by 1 million barrels of a day, to 85.3 million barrels a day.

It also cut its estimate of 2008 demand by 70,000 barrels to 85.8 million barrels.

That implies that world demand in 2008 dropped 0.3% and will drop 0.6% in 2009. The IEA noted the last time that world oil demand dropped for two straight years was in 1982 and 1983.

The IEA said it's slashed estimates on anticipated downward revisions to global GDP forecasts by major international institutions, like the International Monetary Fund and the Organization for Economic Cooperation and Development.

It sliced its global GDP forecast basically in half, to 1.2%, given the worsening outlook not just in developed countries but in Asia and Latin America.

"China's economy, in particular, appears to have sharply slowed down as its main export markets tumble," the group said.

Oil futures have tumbled in recent months from highs of $147 a barrel to $35 a barrel for the February-dated contract.

Eventually, the IEA predicts, a glut in supply will be absorbed as the Organization of Petroleum Exporting Countries cuts production and as governments like China and the U.S. build strategic supplies.

"Demand will eventually rebound to absorb this oil currently struggling to find a market, but predicting the timing and extent of the rebound remains as elusive a target as ever," the IEA said.