NEW YORK (AP):

Crude oil prices in the US are expected to average US$101 per barrel this year, the Energy Department's analytical arm said Tuesday, revising upward its price projection on the back of expected global demand growth and low surplus production capacity.

The Energy Information Administration had previously forecast that the average for the benchmark West Texas Intermediate crude would average US$94 per barrel. The revision comes as crude prices have spiked over the past couple of months, hitting a trading high of US$111.80 a barrel as investors hedged against a weakening dollar.

"The combination of rising world oil consumption and low surplus production capacity is putting upward pressure on oil prices," the EIA said in a monthly report on petroleum supplies and demand. "The flow of investment money into commodities has contributed to crude oil price volatility."

Next year, the agency expects oil to average US$92.50 a barrel, up from a previous projection of $86.

While high prices are damping demand in the US, petroleum consumption remains strong in China, India, Russia and the Middle East, the EIA said.

The EIA also projected that OPEC oil production will average 32.3 million barrels a day this year, up about 100,000 barrels a day from previous forecasts.

Fluctuating prices

On Tuesday, the WTI May futures contract fell 13 cents to US$108.96 a barrel on the New York Mercantile Exchange. But prices fluctuated as investors kept an eye on the dollar and on Iran, which announced plans to expand its uranium enrichment programme.

In oil price projections, the agency acknowledged "significant uncertainty" in its oil price projections, noting that unexpected supply disruptions due to conflict in oil-producing nations, unusual weather or refinery outages could send prices spiralling sharply higher.

"Prices can fall as rapidly under a different set of circumstances, such as easing of geopolitical tensions or further weakening of US and world economic growth," the EIA's report said.

The strength in crude was expected to hit US consumers hard on the retail level, undercutting gasoline demand in the peak summer driving season when many Americans take to the road for vacation.

The EIA said retail gasoline prices will peak near US$3.60 per gallon in June, and high prices and a weak economy are expected to cut gasoline demand by about 0.4 per cent. The government had previously estimated that gas prices would peak near US$3.50 a gallon, but many analysts predict prices will rise even higher and approach US$4 a gallon.

Prices slipped

The EIA said it was also possible that gasolene "prices at some point will cross the US$4 per gallon threshold."

Overall consumption of petroleum products will drop by 90,000 barrels a day this year. Previously, the EIA had projected petroleum consumption would rise by 40,000 barrels a day.

On Tuesday, gas prices slipped slightly to a national average of US$3.331 a gallon from Monday's record of US$3.339, according to AAA and the Oil Price Information Service. Prices are 55 cents higher than a year ago.

Diesel prices, which are already averaging more than US$4 a gallon nationwide, will average US$3.62 a gallon this year, up 74 cents from 2007, the EIA said. Diesel fuel is used to transport the vast majority of the world's food, consumer and industrial products. High diesel prices are one of the reasons food prices are soaring.