Oil prices fell sharply on Wednesday on concerns over the state of the wider economy with the International Energy Agency warning oil consumption growth could drop should the global economic recovery falter.

The rich countries’ energy watchdog revised its projections for global oil demand higher but said the possibility of weaker-than-expected economic growth posed “a significant downward risk” to its forecasts.

Signs of growing economic headwinds – particularly in the US – have knocked crude prices in the past week.

Investors’ concerns were crystallised by the US Federal Reserve, which on Tuesday said the pace of the recovery in the world’s largest economy was “likely to be more modest in the near-term than had been anticipated”.

Data released by the US Department of Energy on Wednesday showed inventories of distillates and gasoline rising more than had been expected, underlining the impression that industrial and consumer demand growth was slowing.

Nymex September West Texas Intermediate dropped $2.23 to $78.02 a barrel, its lowest in nearly two weeks, down from a peak of nearly $83 last week. ICE September Brent fell $1.96 to $77.64.

“As fundamentals come more into focus, it would suggest that there is less real support for oil prices than recent valuations would imply,” said Mike Fitzpatrick, vice-president for energy at MF Global in New York.

Global demand for crude will be 86.6m barrels a day in 2010 and 87.9m b/d in 2011, the IEA predicted – increases of 80,000 b/d and 50,000 b/d, respectively, from its previous forecast.

But the agency also said the world’s oil consumption could undershoot forecasts by 290,000 b/d in 2010 and 1.2m b/d in 2011 if global economic growth was weaker than expected.

On the supply side, the agency said global oil production rose 1 per cent from June to 87.2m b/d in July as Nigeria and the United Arab Emirates increased output within the Opec cartel of producing countries and Norway completed seasonal maintenance.

Output was also boosted by continued increases in production of natural gas liquids by Opec members.

NGLs are premium by-products of crude and gas extraction used to produce liquefied petroleum gas, gasoline or naphtha, a petrochemical feedstock.

The moratorium on drilling in the US Gulf of Mexico will reduce potential oil output by 60,000 b/d this year and 100,000 b/d in 2011, the IEA said, noting that “relative to total offshore Gulf of Mexico production, the impact is still relatively small”.

Elsewhere, base metals slid, tracking equity markets lower on the back of the Fed’s comments on Tuesday and the sharply strengthening dollar.

Copper for delivery in three months fell 1.4 per cent to $7,201.50 a tonne on the London Metal Exchange, 4.3 per cent lower than its recent peak above $7,500.

But the red metal was still up 19 per cent since early June.

Wheat trading was choppy ahead of the US Department of Agriculture’s closely watched forecasts for world agricultural supply and demand, due on Thursday.

CBOT September wheat was up 0.9 per cent to $7.01 a bushel by late morning in Chicago.