Oil fell below $57 a barrel on Thursday after the International Energy Agency (IEA) said global oil consumption will fall this year at the fastest rate since 1981.
The Paris-based IEA, adviser to 28 industrialized nations, said the rise in oil prices to a six-month high above $60 this week was due to sentiment rather than supply and demand fundamentals, with consumption set to fall by 2.56 million barrels per day (bpd) in 2009.
The oil price seems to have moved a bit higher in the past month largely on the basis of equity markets and sentiment about potential economic recovery, David Fyfe, head of the IEA's Oil Industry and Markets Division, told Reuters.
But we're not seeing it in terms of the preliminary demand data for early 2009.
U.S. crude fell $1.20 to $56.82 a barrel at 0857 GMT (4:57 a.m. EDT), having hit $60 a barrel on Tuesday.
London Brent fell $1.16 to $56.18.
The agency said oil demand is expected to average 83.2 million bpd in 2009, down from its previous monthly forecast of 83.4 million bpd. Crude stockpiles in developed countries have risen to their highest since 1993 due to the global recession.
The Organization of the Petroleum Exporting Countries (OPEC), which has announced 4.2 million bpd of production cuts since September in a bid to tighten the market, also pumped more oil in April than in March, the IEA said.
OPEC members' compliance with production quotas has fallen to 78 percent in April from 83 percent a month earlier.
Oil prices have tracked equities markets closely in recent months as traders looked for signs of an economic recovery that could lift ailing world fuel demand. A rally in stock markets this year has helped lift crude prices almost 80 percent from a January low of $32.70.
European shares tracked losses on Wall Street and in Asia ahead of the release of U.S. jobless claims figures due at 1230 GMT (8:30 a.m. EDT).
We're at a point in the economic cycle where the oil market is taking its cue from equity markets. It's not quite focused on fundamentals of the market, Ben Westmore, commodity analyst at National Australia Bank, said.
Unrest in Nigeria, Africa's biggest oil producer, provided some support for prices. Nigeria's main militant group on Thursday gave oil companies in the Niger Delta an additional 48 hours to evacuate their staff and threatened to attack helicopters and planes after the deadline.
The Movement for the Emancipation of the Niger Delta (MEND) on Wednesday had ordered oil workers in Africa's biggest oil producer to leave the delta within 24 hours following heavy clashes between MEND and security forces.
A security source working in the oil industry said it was taking the threat seriously, but there were no plans to evacuate staff.
(Reporting David Sheppard in London and Chua Baizhen in Singapore; editing by William Hardy)