Ananova:

Oil prices have begun to surge again after the industry watchdog said global demand in 2004 would be higher than previously thought.

The cost of crude rose by 2% to $38.65 in New York after the International Energy Agency (IEA) lifted its forecasts of demand by 360,000 barrels a day.

It marked the end of a seven day respite from record oil prices which peaked this month at more than $42 a barrel.

Opec, which supplies 34% of oil worldwide, took some of the steam off the market earlier this month by raising output quotas by more than 2 million barrels.

But investors reacted nervously to the IEA report on the oil market in June with the FTSE 100 Index following Far Eastern stock markets into the red.

The rise in oil prices put renewed pressure on airlines, with British Airways among the heaviest blue-chip fallers in London and low-cost airline easyJet also in retreat.

The IEA said global oil demand was being driven by China in spite of attempts by the national government to slow down the breakneck rate of economic growth.

Although China represents only 6.8% of global oil consumption, it is expected to account for 34% of the growth in demand this year.

Oil experts at stockbrokers Morgan Stanley said new pipelines and port storage facilities in China had driven demand to an unsustainably high level.

This "one-off" requirement to build up stocks meant demand for oil in the world's most populous nation was likely to moderate in future.

Oil consumption is also growing in the United States at the beginning of the summer driving season and at a time when its refining industry is suffering difficulties.

Other reasons driving the cost of crude include fears of terrorism, market speculation by hedge funds, and the refusal by the US to release crude supplies from its Strategic Petroleum Reserve.