In its monthly forecast, the agency also cut its oil demand growth estimate for 2013 by 360,000 bpd to 730,000 bpd.

The EIA said global oil and liquids demand growth was likely to be slower than previously expected due to less optimistic forecasts for global economic growth, which were lowered by 0.1 percent in 2012 and 0.6 percent in 2013 versus a month earlier.

The weaker outlook for global demand means that West Texas Intermediate crude prices should average $88 per barrel during the second half of 2012, a drop of $7 per barrel from the EIA's forecast a month ago. The EIA expects WTI to remain around the same average price in 2013.

European benchmark Brent crude should average $106 per barrel this year and fall to an average $98 per barrel in 2013, the EIA's report said. The EIA is adding a Brent crude price forecast to its monthly short-term energy report (STEO) starting this month.

"EIA's downward price revisions reflect shifts in expectations about oil market balances and the additional downside risks that are currently dominating market sentiments," the report said.

U.S. WTI crude futures fell to around $85 per barrel in Tuesday trading, while Brent declined to around $99 per barrel.

Lower expectations for world oil demand growth is attributable to "the debt crisis in Europe and possible weak economic growth in China," said EIA Administrator Adam Sieminski. Still, he said "most of the growth in oil demand next year will occur in China, the Middle East and Brazil."

IRANIAN AND U.S. PRODUCTION

Sanctions against Iran should prompt the Islamic Republic's crude output to fall by some 1 million bpd by the end of the year, to 3.6 million bpd, Sieminski said. Iran's output should decline by a further 200,000 bpd next year, he said.

Iran's projected declines will come as the United States quickly ramps up production from oil-bearing shale plays, the report said.

U.S. crude production is expected to average 6.3 million bpd this year, up around 600,000 bpd from 2011 levels, and the highest since 1997. U.S. crude output should rise another 400,000 bpd to 6.7 million bpd in 2013, the EIA said.

"That increase is driven by increased oil-directed drilling activity, particularly in (U.S.) onshore tight oil formations," the EIA report said.

U.S. average regular retail gasoline prices were also projected to decline, to $3.39 a gallon in the third quarter of 2012, the report said. Gasoline averaged $3.53 per gallon in 2011, but is expected to average $3.49 a gallon this year and $3.28 per gallon in 2013, the report forecast.