Worldwide demand for oil is shrinking as industrialised countries slip deeper into recession, the Organisation of Petroleum Exporting Countries (Opec) said on Tuesday, opening the door for a substantial production cut when it meets in Algeria this week.

Opec is widely expected to slash production by as much as 2 million bpd when it meets in Oran, Algeria, on Wednesday as the group struggles to put a floor under prices which have collapsed by two-thirds since peaking above $147 a barrel in July.

Indeed, if the recession deepens, 'the growing imbalance on the oil market presents a real challenge for all market participants and will be the main focus of discussion' at Opec ministers' meeting, the cartel said in its December monthly report.

The first drop in world oil demand in 25 years will sharply lower the need for Opec crude in 2009, the report added.

Opec said demand for its crude is expected to fall by an average of 1.4 million barrels per day (bpd) next year, with the first half of 2009 seeing an even steeper decline.

Global oil demand is now expected to decline by an average of 150,000 bpd in 2009 to average 85.7 million bpd due to a marked slowdown in the world economy.

That represents a 640,000 bpd downward revision to Opec's estimate last month, which forecast global oil demand would grow by 490,000 bpd in 2009.

The producer group also forecast non-Opec supply would now grow by just 640,000 bpd in 2009  - compared to 710,000 bpd in last month's report - while its estimate of non-Opec supply growth in 2008 has been revised down to 100,000 bpd from 200,000 bpd the previous month.

'Given negative growth in world oil demand and positive growth in non-OPEC supply, the demand for Opec crude is projected to decline sharply in 2009, falling 1.4 million bpd to average 30.2 million bpd,' Opec said in the report, which is written by economists based at its Vienna headquarters.

'Moreover, in the first quarter of 2009, the demand for Opec crude is expected to see a sharp drop of 2.3 million bpd from the same quarter in the previous year.'

The United States will account for most of the decline, while China, the Middle East, and other Asian countries would see a rise in demand. Already this year, the financial crisis was hitting oil demand 'not only in the US but also in major OECD countries,' Opec added.

The producer group, responsible for two out of every five barrels of oil in the world, said that the demand for its crude was now expected to average 31.6 million bpd in 2008.