The International Energy Agency urged oil producers on Wednesday to take account of dwindling stocks of crude oil in the industrialized world in deciding next week whether to relax stiff output curbs.

The West's energy watchdog said this year bore a striking resemblance to 1999, when a sharp drop in stock levels over the winter coincided with an economic recovery to push oil prices to decade-highs in 2000.

"Producers debate whether or not to increase quotas. The important issue is to recognize that crude stocks are uncomfortably low going into the heating season," the IEA said in its monthly oil market report.

OPEC oil exporters are set to decide in eight days' time whether to relax output quotas for the first time in two years, amid calls from several cartel members to hold current limits.

World oil prices are already hovering near their highest level in a year, at $29 for North Sea Brent and $30 for U.S. crude.

The IEA, which was set up in the 1970s to counter the cartel power of OPEC, did not openly call for OPEC to raise output, but hinted that more supply was needed to cover peak winter demand.

"In 1999, stocks plummeted, paving the way for high oil prices and extreme volatility in 2000. Today's situation is every bit as precarious," the report said, citing a fragile world economic recovery and the threat of war in Iraq.

Paul Horsnell, oil analyst at J.P.Morgan, concurred with the IEA in its assessment of tightening markets.

"This market is tightening far faster than many believe, including some members of OPEC," Horsnell said.

THINNING INVENTORIES

Oil inventories in the industrialized world fell by 21 million barrels in July to 2.6 billion barrels, the IEA said, in a period when stocks normally build up.

Compared to July last year, crude oil stocks in the Organization for Economic Cooperation and Development (OECD) stood at a seven million barrel deficit, while stores of refined oil products were at a 16 million barrel surplus.

The much-heralded recovery in demand was on track, albeit sluggish, said the IEA, which is an arm of the OECD.

Some members of the Organization of the Petroleum Exporting Countries, which controls two-thirds of world exports, see the weakness of the global economy as one reason not to release more supply at next week's meeting.

But Horsnell said OPEC was not pumping enough oil to hold inventories up in the third quarter, let alone in the fourth quarter when demand will surge.

World oil demand in the fourth quarter is expected to rise 1.1 million barrels per day versus last year, the biggest quarterly growth since early 2001.

OPEC, meanwhile, holds onto its lowest output quotas in a decade.

"The market bears may be correct about soft fundamentals and a weak global economy over some longer time frame, but their conclusions do not apply in the short term as the northern hemisphere heads into winter," the IEA said.

The IEA kept steady its forecast of demand growth this year at 220,000 bpd, one of the weakest growth rates on record, but saw demand accelerating to 1.1 million bpd next year.

OPEC price hawk Venezuela has argued that current oil prices contain about $4 of "war premium" reflecting the risk of a U.S. attack on Iraq and its consequences.

But the IEA said such talk underestimated the strength of the oil market balance.

The IEA said OPEC was pumping about 1.7 million barrels per day above its official quotas, but that this only barely compensated for output drops in sanctions-bound Iraq.

Iraq is pumping at about half its capacity because of a long-running pricing dispute with the United Nations.