Oil Down on IEA Forecast

Updated from 10:37 a.m. EDT

Crude futures tumbled below $64 a barrel Tuesday after the International Energy Agency and the Energy Department shaved their projections for global oil demand this year amid high inventories and lofty prices.

Oil prices have fallen $15 since July as domestic inventories have grown, the hurricane season has remained quiet, and tensions over Iran's nuclear program have cooled. The price of crude typically rises and falls on threats or the appearance of threats to worldwide supplies because there is so little of it to cover spikes in demand.

Light, sweet crude for delivery in October plunged $1.85 to a five-month low of $63.76 a barrel on Nymex. The front-month contract, which has declined for the past seven days, was last this low on March 22 at a closing price of $61.77.

Wholesale unleaded gasoline and heating oil sank 4 cents to $1.61 a gallon, and $1.81 a gallon, respectively. Natural gas lost 9 cents to $5.57 per million British thermal units.

The IEA, an international energy advisor, revised its expectation for world oil growth as consumers recoil at high energy prices and cut back on consumption. The Paris-group now expects demand to come in at 84.7 million barrels per day, or 100,000 barrels less than its August estimate. The U.S. Energy Department, in its monthly energy outlook released Tuesday, expects the same.

Next year, IEA projects demand of 86.2 million barrels per day, or 160,000 barrels less than its previous projection. The Energy Department also cut its demand forecast by 100,000 barrels to 86.7 million barrels per day.

The revised estimates come a day after the Organization of the Petroleum Exporting Countries said it would maintain its production quota of 28 million barrels per day. The cartel, which controls 40% of the world's crude, has maintained that level since July 2005 to help ease prices and pump up global supplies.

However, OPEC ministers have suggested they may cut production if prices continue sliding. Iran's oil minister said Tuesday oil prices should remain above $60 a barrel. High inventories, drooping demand for energy products and an easing of tensions with Iran, the world's fourth-largest producer, has helped drive down oil prices.

The Energy Department expects crude prices to average $72.82 a barrel in the third quarter, down $2.48 from its previous forecast, thanks to falling gasoline prices. But the federal agency expects prices to perk up in the fourth quarter.

Traders will be keeping an eye on the release of the U.S. Energy Department's weekly petroleum supply report Wednesday morning. Analysts polled by Bloomberg expect inventories of gasoline to climb by 500,000 barrels last week. Gasoline stockpiles typically climb after the peak driving season ends on Labor Day weekend.

Distillates, thanks to high production and low demand, will likely rise by 2 million barrels. Before the winter heating season, refineries typically stockpile distillates, a category that includes heating oil, in expectation of heating demand.

Refining run-rates will probably remain the same, though crude inventories will likely drop by 2 million barrels as refiners produce more distillates.

Energy shares were marginally higher, with the Amex Oil and the Philadelphia Oil Service Indices up as much as 0.6%. Total(TOT Quote - Cramer on TOT - Stock Picks), Repsol(REP Quote - Cramer on REP - Stock Picks), BP(BP Quote - Cramer on BP - Stock Picks) and Valero Energy(VLO Quote - Cramer on VLO - Stock Picks) were leading advancing shares among drillers and refiners on the Amex Oil Index, up 0.1% to 1%.

BP was picking up 26 cents, or 0.4%, to $65.15 after the oil company said it would ask federal officials for approval to restart output in the shuttered eastern half of the Prudhoe Bay oil field. The country's largest oil field is producing 200,000 barrels per day, or half of its production before BP shut down the field to fix corroded and leaking pipelines.

Chevron(CVX Quote - Cramer on CVX - Stock Picks), Devon Energy(DVN Quote - Cramer on DVN - Stock Picks) and Statoil ASA(STO Quote - Cramer on STO - Stock Picks) may save more than $1 billion in royalties to the federal government on a recent deepwater oil discovery in the Gulf of Mexico, the New York Times reported Tuesday. The companies announced last week they had discovered a field that could hold from three billion to 15 billion barrels of natural gas and oil. Domestic reserves could double if there were 15 billion barrels.

Thanks to mistakes in offshore leasing agreements signed in 1998 and 1999, companies do not have to pay royalties on oil discoveries. There was supposed to be a clause imposing taxes on companies if oil prices soar past $36, but it was mistakenly omitted. Already, oil companies have come under fire for the leases and several have agreed to renegotiate their contracts.

Shares of Chevron were dipping 0.6% to $61.58, and Devon was declining 1.2% to $65.04. Statoil was shrugging off the news and rising 0.8% to $24.17.