The oil market is cooling as the global economy slows down, the IEA said on Tuesday but said a price "paradox" is at work despite a revival of Libyan production.

The International Energy Agency pointed to slowdown in growth of economies, including in China, and of oil demand almost across the globe, but it also warned of tight supplies and inventories.

The agency said its baseline for global economic growth for this year was 3.9 percent, down from 4.2 percent previously, and for next year 4.2 percent down from 4.4 percent and these estimates could well fall again in October.

The agency also estimated that underlying demand for OPEC oil and changes in inventories for the third quarter was 31.3 mbd, and was set to be 30.0-30.5 mbd for the next three quarters. This was close to OPEC output levels.

"That suggests that the recent spell of market tightening could moderate in the short term, assuming that recent supply disruptions also recede."

News that oil production had been resumed in Libya was "most welcome" even though full operational recovery would take time.

But the IEA talked of a price "paradox", and itself blew warm and cold on the outlook.

"The potential for weaker oil demand is tempering price moves on the upside. Oil prices have been held hostage to almost daily negative economic and financial market reports."

But it also warned that "supply woes may yet keep a floor under prices heading into the fourth quarter of 2011 winter demand period."

It said that even though OPEC production had risen in August, it remained 1.04 mbd below expected demand for OPEC oil in the third quarter of 31.3 mbd.

"The supply gap is becoming increasingly apparent in reported stock holdings, with total OECD commercial oil stocks falling below the five-year average for the first time since the recession."

Overall, in the absence of new demand and supply surprises, the way could be open to "a more comfortable market balance," the IEA said.

The IEA cut its estimate for oil demand this year by 200,000 barrels per day and by twice as much, 400,000 barrels per day, for next year.

This meant that demand was set to total 89.3 million barrels per day this year marking an increase of 1.2 percent from demand last year, and 90.7 mbd in 2012, an increase from this year's level of 1.6 percent.

"Overall, global oil demand continues to expand only at a tepid pace," the report said.

"Market observers are puzzling over the 'paradox' of weakening economic growth and oil demand indicators on the one hand, and $110 per barrel (of) crude on the other," it said in its monthly report.

The price of North Sea Brent quality crude had ranged between $105 and $120 per barrel since May. The Brent price for October was down 14 cents to $112.11 in London after the report was published. The price of light sweet crude for October delivery was up 39 cents to $88.58 dollars per barrel.

The release of IEA strategic oil stocks in response to a shortage of supplies from Libya, and a stock market plunge in August, had each caused the oil price to plunge by about $10 dollars a barrel.

"But prices have stubbornly reclaimed lost ground again within weeks, raising anew questions about the key drivers of prices," the IEA commented.

However, "there are certainly growing concerns about the health of the global economy."

The IEA said this meant it was trimming its estimate for growth of demand for oil to 1.0 million barrels per day this year and 1.4 mbd next year.

But the agency also referred to its previous medium-term outlook estimates in which it had predicted two backdrops for economic growth.

Now, it said, if its lower picture for growth were to materialise, with growth being one third lower than under the stronger forecast, "oil demand growth slips to a much weaker 0.7 mbd and 0.4 mbd in 2011 and 2012 respectively."

The IEA is the energy monitoring and policy branch of the Organisation for Economic Cooperation and Development. Its latest estimate for oil demand in the OECD area of advanced countries was 45.8 mbd this year, a fall of 370,000 barrels per day or 0.8 percent from the level in 2010.

Next year demand would total 45.6 mbd, a fall in demand of 240,000 bd or 0.5 percent from this year's level.

The cut reflected reduced growth assumptions "particularly in North America and Europe."

For countries outside the OECD area the oil demand estimate was cut by 180,000 bd to 43.5 mbd, an increase of 1.4 mbd or 3.3 percent for this year, and to 45.1 mbd, an increase of 1.7 mbd or 3.8 percent next year.

"We have downgraded GDP (gross domestic product) growth moderately, largely due to China," the IEA said.

The GDP growth estimate for China was trimmed from 9.6 percent for the next two years to 9.5 percent and then 9.1 percent next year. Estimated demand for oil fell by 20,000 bd this year and by 50,000 bd next year. This meant oil demand would grow by 5.8 percent and 5.1 percent.

Global supplies of oil rose by 1.0 mbd in August to 89.1 mbd, with non-OPEC oil production rising by 800,000 bd.

Output by members of the Organization of Petroleum Exporting Countries rose by 165,000 bd in August to 30.26 mbd. "We have revised up our Libyan capacity outlook for the fourth quarter of 2011 to 0.3 mbd," the report said.

OECD industrial oil inventories rose in July by 10.8 mb to 2,687 million barrels or the equivalent of 58.4 days of demand, but overall OECD commercial stockpiles fell below the five-year average for the first time since the recession in 2008.