Updated from 12:08 p.m. EST

Oil prices were retreated from two-week highs Friday after OPEC trimmed its 2006 demand forecast in response to growing domestic inventories.

Crude for April delivery closed down 81 cents at $62.77 a barrel on the Nymex. On Thursday, the contract climbed 2% to close at $63.58 following an American-led air assault in Iraq and continuing concerns about Iran's nuclear development. Although the invasion has little to do with oil supplies, traders were quick to seize on it.

The Organization of the Petroleum Exporting Countries shaved its estimate for world demand by 100,000 barrels to an average of 84.5 million barrels a day due to lower consumption. High crude prices have moderated the world's appetite for oil.

OPEC's lower estimate comes on the heels of another revised forecast for world demand growth. The International Energy Agency, which advises 26 industrialized nations on energy issues, cut its forecast by 340,000 barrels a day to 84.7 million barrels this year. Rising petroleum prices and lower demand in Southeast Asia were cited for the reduction.

Still, the reduced estimates weren't very large, and analysts said geopolitical problems and their potential to slash already tight world inventories would impact oil prices more. Growing demand from U.S. and Asian economies have crimped razor thin inventories and driven up prices.

"OPEC's move isn't going to matter much in the long run," said Bart Melek, a senior economist with BMO Nesbitt Burns, an investment bank based in Toronto. "At the end of the day, we still have geopolitical tensions."

Iran's nuclear ambitions and lower Nigerian petroleum exports have helped prop up oil prices this year. After a two-and-a-half-year hiatus, Iran restarted uranium enrichment in a bid to generate nuclear power, though the U.S. and its Western allies suspect Tehran has more ambitious goals to develop atomic bombs. The U.N. Security Council is discussing what measures, if any, to take against Iran for its move. Economic sanctions have been mentioned as an alternative, but they're seen as unlikely because there is not enough crude to make up for Iran's 4.4 million barrels of daily output.

Tehran has threatened to use oil as a weapon, and could cut exports to spite the West. The straits of Hormuz, through which 14 million barrels of oil passes per day, is also controlled by Iran and the flow of traffic could be affected if Iran chose.

In Nigeria, militants have attacked platforms, blown up pipelines and kidnapped foreign oil workers to pressure the government to give it a share of the country's petrodollars. They have managed to shave oil exports by 25% to 1.6 million barrels per day in Africa's biggest crude producer.

World tensions were playing against a backdrop of booming U.S. crude supplies, which now stand at seven-year highs, the U.S. Energy Department reported on Wednesday. In a weekly supply update, inventories climbed 4.8 million barrels to 339.9 million barrels last week thanks to seasonal refinery maintenance. Crude, which is processed into heating oil and distillates, has been building up at refineries.

In the coming weeks, crude inventories will probably remain high because spot prices are lower than futures prices. When prices are in "contango," companies purchase crude on the spot market rather than draw on their supplies. May crude settled at $64.20 and June crude closed at $65.06.

Operating problems and the phase-out of MTBE, a gasoline additive linked to water pollution, has helped deplete inventories of gasoline and distillates and driven up prices. Stockpiles of gasoline fell 900,000 barrels to 223.9 million barrels last week, while distillates, which include heating oil, plummeted 3% to 127.5 million barrels.

Refiners are loath to produce large quantities of gasoline with MTBE since the additive has to be discontinued by May. After then, gasoline must be blended with ethanol.

Prices for gasoline, which are up 15% this month, are expected to remain volatile because of the reduction in MTBE and the onset of the spring and summer driving season. Unleaded closed down 1 cent to $1.86 a gallon on Friday.

"Gas will be leading us out of this dull market," said James Cordier, head trader at Liberty Trading Group in Tampa, Fl. "We see April and May as very strong markets for gas. We could see it test $2 or $2.10 a gallon."

Crude could follow gasoline prices up this summer. Cordier estimates oil prices will again test $70 a barrel, like they did following Hurricane Katrina's touchdown on the Gulf Coast. Hurricanes shut down much of the region's oil production last fall.

"Gasoline at $2.50 a gallon isn't going to keep people from going on their spring and summer vacations," Cordier said.

Gasoline futures of reformulated fuel, known as RBOB, lost 1 cent to $1.93 a gallon. Trading of the RBOB contract, which recently debuted on the Nymex, has been light, but will likely increase as traders move away from the current contract, which covers gasoline with MTBE.

High inventories drove down prices of heating oil by 3 cents to $1.78 a gallon and natural gas by 21 cents to $7.05 per million British thermal units. Both fuels are used to generate electricity and heat. Thanks to an unseasonably warm winter, there is 31% more natural gas in storage than last year, more than enough to ride out any cold snaps.

Falling crude prices were pulling down shares of energy companies. ConocoPhillips ( COP) was losing $1.09 to $61.25; Shell ( RDS-A) was falling 88 cents to $62.14, and ExxonMobil ( XOM)was down 63 cents to $61.01. BP ( BP) was inching down 45 cents to $69.45 and Valero Energy ( VLO) was declining 76 cents to $57.76.