Oil prices slipped Wednesday after the U.S. Energy Department cut its crude demand forecast for 2009, stalling a two-week rally.

Prices fell despite expectations that OPEC would cut back on production at its weekend meeting in Vienna.

Benchmark crude for April delivery dropped 21 cents to $45.50 US a barrel by midday in Europe on the New York Mercantile Exchange. Oil prices fell $1.36 on Tuesday to settle at $45.71.

The Department's Energy Information Administration said Tuesday it lowered its forecast for global oil demand for this year by 200,000 barrels a day from last month and now projects a decline of almost 1.4 million barrels a day in 2009. Its projection for global oil consumption this year is now three million barrels a day below its forecast from September.

The EIA report cut its estimate for the average oil price to $42 per barrel for 2009 and $53 in 2010 from $43 and $55 last month.

On Wednesday, the Paris-based International Energy Agency will release its forecast for global demand.

"The EIA report took the wind out of the sails of the rally and we saw people taking profits," said Gerard Rigby, an energy analyst at First Fuel Consulting in Sydney, Australia.

"It highlighted the fact that products demand has been decreasing, not increasing," he said.

Oil prices have risen from less than $35 a barrel last month as U.S. crude inventories fell two of the last three weeks.

Sinking auto sales depress oil prices

Vienna's JBC Energy noted, however, that automobile sales are plunging around the world, another trend expected to depress prices in the mid to longer term.

"In February, U.S. passenger car sales dropped by 39 per cent year-on-year, while sales in Europe also fell sharply," said its research note.

Still, the market was poised for an uptick in prices, with the EIA to release the latest inventory figures for the week ended March 6 on Wednesday. Analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos., expect the government will report that inventories of both crude and gasoline declined last week.

"If the reports come in with a drop in crude levels, I think the market will bounce back," Rigby said.

"If there's an increase, it could go the other way and we sell off a bit more," he said.

Investors are also anticipating OPEC will announce another production cut at the group's next meeting Sunday in Vienna. The Organization of Petroleum Exporting Countries has already announced output quota reductions of 4.2 million barrels a day, and analysts expect the 12-member cartel will cut at least 500,000 barrels a day more.

"It could be argued that the market has already priced in a production cut," Rigby said.

"But I think a cut of 500,000 barrels will probably add $1 or $2 while a one-million barrel cut would increase prices by $2 to $3," he said.