The price of oil has fallen too far in response to a decline in world demand for fuel, the head of the International Energy Agency (IEA) said on Thursday.

Oil has dropped more than $100 a barrel from an all-time high above $147 in July as the worst financial crisis since the 1930s has eroded consumption.

'Sometimes the market is overshooting upwards and downwards, and this time this is definitely happening downwards,' Nobuo Tanaka, the IEA's executive director, told Reuters.

'In the short-term the market sees disastrous demand. A contraction is happening, so the market is reacting a little too much. The market is driving the price much lower than it should be.'

He did not say where oil prices should be. The world's top oil exporter Saudi Arabia said on Saturday crude at $75 a barrel was 'fair'.

Saudi Oil minister Ali Al-Naimi later said that oil at that level would encourage new output from marginal, higher cost-sources.

Tanaka also urged producing countries and international oil companies to pursue their planned projects to avoid a supply crunch in the mid-term when demand in recession-hit nations recovers.

Oil at current levels of about $46 a barrel should not deter Opec countries from developing new oilfields, Tanaka said.

'In a conventional crude, especially in the Middle East OPEC countries, I see that production cost is much lower than the current price level,' he said.-Reuters