LONDON: Oil prices extended losses Friday on weak energy demand and news the US commodity and options regulator was looking to tighten controls in the energy futures market, analysts said.

In a report, the International Energy Agency also said oil demand in 2010 will be "sluggish" in the developed world, with emerging markets accounting for any increases and top producers switching supplies to eastern growth markets.

New York's main futures contract, light sweet crude for delivery in February, fell 45 cents to 78.94 dollars a barrel in Friday trading.

Brent North Sea crude for March delivery dropped 56 cents to 78.01 dollars a barrel.

Oil prices had already slipped on Thursday as traders weighed weak energy demand in the United States that raised concern about the strength of a fragile recovery in the world's largest economy.

The US Department of Energy (DoE) on Wednesday reported an unexpected increase in US petroleum reserves.

In a roller-coaster week for oil markets, New York crude rose to a 15-month high of 83.95 dollars on Monday on the back of robust Chinese data but subsequently tumbled on news that Beijing was tightening money supply to tame economic growth.

"I think this was a much-needed correction... because oil had run up to almost 84 dollars per barrel," said Tony Nunan, a risk manager with Mitsubishi Corp.

"A lot of this optimism and euphoria was driven by Chinese demand." Like the US, China is a major oil consumer.

Nunan said the increase in US energy stockpiles "was a reality check because people realised that the inventories were still high... so there's a lot of fear and uncertainty in the market now."

The DoE said crude reserves soared 3.7 million barrels in the week ending January 8, far more than the consensus forecast for a 1.0-million-barrel gain.

Distillates -- including heating fuel and diesel -- rose 1.4 million barrels, the DoE said, confounding forecasts for a 1.8-million-barrel drop.

Distillates are currently in focus amid an ongoing cold snap in the United States, the world's largest energy consumer, but forecasters have predicted milder weather for the weeks ahead.

Prices were also impacted by the Commodity Futures Trading Commission's proposal Thursday to regulate the energy futures market.

"There's a strong feeling that it could impose positions on energy contracts so I think that was one of the bearish catalyst to oil prices," Nunan said.

Meanwhile the International Energy Agency on Friday warned of possible "downside risks" to economic recovery for members of the Organisation for Economic Cooperation and Development (OECD), a grouping of 30 of the world's richest economies.

"Oil demand recovery in the OECD will likely remain sluggish," the Paris-based IEA said in its monthly oil market report.

"Demand growth in 2010 derives entirely from outside the OECD," it added.

The IEA left unchanged an earlier forecast of a 1.7-percent rise in demand in 2010 from 2009 to 86.3 million barrels per day (mbd).

The report explained that much of that increase would come from Asian markets and some of it from Latin America and the former Soviet Union.