World oil demand will rise faster than expected to 2012 while supply lags, the International Energy Agency said on Monday, leading to a tighter market than previously anticipated.

In its Medium-Term Oil Market Report, the adviser to 26 industrialized countries said demand will rise by an average 2.2 percent a year between 2007 and 2012, up from a previous medium-term forecast of two percent.

The outlook, which updates an IEA forecast last issued in February, coincides with a jump in oil prices to more than $75 a barrel, closing in on a record high near $79, on concerns of a tightening market.

Despite four years of high oil prices, this report sees increasing market tightness beyond 2010, the IEA said.

It is possible that the supply crunch could be deferred -- but not by much.

The IEA's previous Medium-Term report, published in February, called for world demand growth of two percent a year between 2006 and 2011.

It now expects global demand to reach 95.8 million barrels per day from 86.1 million bpd in 2007. The forecast assumes average global GDP growth of 4.5 percent annually.

The Paris-based IEA also said additional global refining capacity over the next five years will lag earlier expectations as rising costs and a shortage of engineers delays construction.

It also said world production of biofuels would reach 1.75 million bpd by 2012, more than double 2006 levels, but the fuel will remain marginal as economics hobble further growth.

LOWER OPEC CAPACITY

The report points to a greater reliance on the 12-member Organization of the Petroleum Exporting Countries, source of more than a third of the world's oil.

While foreseeing higher demand, the IEA expects less supply to come from producers outside OPEC and the agency also trimmed a forecast for the group's unused production capacity.

A stronger demand outlook, together with project slippage and geopolitical problems has led to downward revisions of OPEC spare capacity by 2 million bpd in 2009, said the report.

The forecast assumes no net expansion of capacity from Iran, Iraq and Venezuela and that the 500,000 bpd of Nigerian production that has been shut for a year will not reopen during the next five years.

The IEA in its Monthly Oil Market Report has for the past four months urged OPEC to open the taps to lower prices.

OPEC says crude supply is sufficient and blames other factors, such as a strain on oil refineries, for high prices.

Some analysts say the IEA is being alarmist and that its warnings about supplies are actually leading to higher prices.

The International Energy Agency has put such a fear premium in the market that crude futures remain bought no matter what, said Olivier Jakob of Petromatrix.

PLATEAU OIL

The IEA trimmed its forecast for supply from non-OPEC producers by 800,000 bpd in 2011, partly because of project delays, and touched on the thorny subject that oil supplies are nearing a peak.

Certainly our forecast suggests that the non-OPEC, conventional crude component of global production appears, for now, to have reached an effective plateau, rather than a peak, the report said.

Falling output at ageing fields and setbacks such as 2005's hurricanes in the Gulf of Mexico have slowed growth in non-OPEC output in recent years.

Lower supply from non-OPEC countries and rising demand will boost the requirement for OPEC oil.

The IEA said demand for OPEC crude, or the call on OPEC, will rise to 34.7 million bpd in 2011, up 1.3 million bpd from the previous projection.

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