July 1 (Bloomberg) -- The International Energy Agency said a drop in OPEC spare capacity and delays to production projects will keep the oil market `tight.''

Lower-than-expected output growth and a ``negligible'' OPEC supply cushion may counter the impact of record prices on consumption. The Paris-based adviser to 27 oil consuming nations cut more than 3 million barrels a day from its 2012 global demand forecast in its Medium-Term Oil Market Report today.

``With oil prices hitting $140 we are clearly in the third oil shock, with prices affecting economic growth,'' IEA Executive Director Nobuo Tanaka said at the World Petroleum Congress in Madrid today. ``Truck drivers are going on strike. Airlines are closing down.''

While the IEA expected its barrel-counting analysis would show weaker demand, the ``surprise'' was that its supply forecast also needed to be cut, Tanaka said. Growth in global supply capacity will peak at about 2.5 million barrels a day in 2010, slowing to less than a million a day for the following three years, the report said.

The oil market will be ``tighter'' than previously expected because many major oil projects are experiencing ``slippage'' of 12 to 15 months in their completion time, he said.

Oil prices touched a record $143.67 a barrel in New York yesterday on concerns of a disruption to Iranian output, capping a 47 percent increase in the first half of the year.

Global Demand

Global oil demand will expand by 1.5 million barrels a day, or 1.6 percent a year on average in the five years between 2009 and 2013, the agency said, compared with a forecast of 2.2 percent a year to 2012 in its previous report, issued last July.

Drivers are switching to smaller, more efficient cars and making fewer journeys to reduce spending on gasoline that's reached more than $4 a gallon in the U.S., the world's biggest energy consumer. U.S. gasoline purchases have dropped every week since the start of the peak driving season last month.

Oil demand is ``a function of economic growth,'' BP Plc's chief economist Christof Ruhl said today in an interview in Madrid. ``If the growth slows down this will affect demand growth.'' Ruhl said he expects global economic growth to slow this year.

The agency trimmed its 2012 outlook the most, by 3.43 million barrels a day, or 3.7 percent, to 92.39 million barrels a day. Demand will be 94.14 million barrels a day in 2013. The 2009 projection was cut 2.6 percent to 87.74 million barrels.

``Project delays remain a major factor in supply-side underperformance, with slippage estimated at up to 12 months on average for the large projects surveyed, alongside an estimated doubling of costs,'' the report said.

Kashagan Field

Hold-ups at developments such as Kazakhstan's Kashagan field, hailed at the time as the biggest oil discovery in 30 years, and ultra deep-water sites in the Gulf of Mexico mean these projects will ``either make a limited contribution, or no contribution at all'' to global supply by 2013.

The agency reduced output forecasts for countries outside the Organization of Petroleum Exporting Countries by 1.41 million barrels a day, or 2.8 percent, in 2012 to 50.68 million barrels a day.

The lower prediction was because of ``an abrupt slowdown in Russia'' as ``the country grapples with an unattractive tax structure'' that's holding back investment.

Non-OPEC production, including biofuels, will increase 0.5 percent a year to 51.1 million barrels a day in 2013 from 49.9 million barrels a day this year, buoyed by increases in North and Latin America and the former Soviet Union.

`Negligible Levels'

Effective OPEC spare capacity will rise from 2.5 million barrels a day in 2008 to over 4 million a day in 2010 before fading to ``negligible levels'' of around 1 million barrels a day by 2013, the report said.

To balance supply and demand, the world will require OPEC to pump 34.64 million barrels a day in 2012, the IEA estimated, which is 1.54 million barrels a day less than it calculated a year ago.

Tanaka said he hoped China and India would join the agency ``soon'' because emerging nations will become more important than developed nations for the oil market.

The IEA rejected the argument put forward by OPEC ministers that this year's surge in prices has been driven by speculative investors including hedge funds and Wall Street banks.

``The fact that all producers are working virtually flat out and that there is no sign of any abnormal stockbuild gives a strong indication that current oil prices are justified by fundamentals,'' the IEA's report said. ``Speculative bubbles occur when speculators cause or facilitate speculative physical stockbuilding.''

This is the IEA's Medium-Term report was introduced as a bridge between the agency's monthly reports, which give two-year forecasts, and its annual world energy outlook, which has 25-year projections.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

Last Updated: July 1, 2008 12:47 EDT