In its monthly oil market report, the U.S Energy Information Administration -- the statistical arm of the Energy Department -- said benchmark West Texas Intermediate oil prices would average $122.15 a barrel, up from its previous forecast of $109.53 a barrel.

The dramatic hike in its oil price forecast came amid expectations that supply from non-OPEC nations this year would average just 49.45 million barrels per day, down 290,000 bpd from the EIA's forecast a month ago.

The agency said it is still calling for non-OPEC supply to jump 820,000 bpd later this year as big fields in Brazil and Azerbaijan come online. But given recent delays, the EIA hedged its bets on the probability of such supplies materializing as planned.

"Given recent history, EIA believes that the pace and timing of non-OPEC supply growth will continue to be subject to possible delays in key projects and accelerating production declines in some older fields," the agency said.

The slower growth in supply from non-OPEC countries will keep supplies tight despite weakening growth in demand, as high prices hit consumers, the EIA said.

The EIA cut its forecasts for U.S. demand by 100,000 bpd and global oil demand by 210,000 bpd in 2008.

High prices and economic turmoil will cause U.S. oil consumption to fall by 290,000 bpd in 2008, and drop by 440,000 bpd if mandated U.S. ethanol use is included, the EIA said.

The price outlook is unlikely to improve in 2009, the EIA said, with WTI expected to average $126 a barrel.

In a rare bright spot in the report, the EIA projected light disruptions to crude oil and natural gas supply due to hurricane activity in the Gulf of Mexico this storm season, which runs from June through November 2009.

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