London (Platts)--13Jun2012/538 am EDT/938 GMT

The world oil market is currently better supplied after an easing of the fundamental supply/demand balance in recent months, but it is not over-supplied, the International Energy Agency said Wednesday.

In its latest monthly oil market report, the IEA said the market could clearly be characterized as "better supplied, but 'over-supplied' looks something of a stretch, given the myriad uncertainties that lie ahead for the summer."

It added: "There have been calls by a number of producers for 'over-production' to be reined in. Memories are indeed short: crude prices remain very high in historical terms, and are acting as a drag on household and government budgets in OECD and emerging markets alike."

The IEA report comes a day before OPEC meets in Vienna to review output policy. With the group currently producing more oil than its agreed production ceiling and prices having fallen notably in recent weeks, a number of OPEC ministers have called for output to be brought back to agreed levels.

The IEA said it did not expect Thursday's OPEC meeting to result in any change to the formal production ceiling of 30 million b/d, but that actual OPEC production may "trend slightly lower in the third and fourth quarters if the EU embargo and US sanctions crimp Iranian oil sales further."

"However, with prices for benchmark Brent still near $100/barrel, the producer group is expected to maintain the status quo," it said.

"Looking ahead, if the eurozone or Chinese economy slows more quickly than envisaged here, weaker customer demand would naturally see producers scale back output," it added.

If OPEC output remained unchanged for the rest of this year, then this could result in an overhang of oil stocks in OECD countries, although any reduction in Iranian supply or additional buying from China would change that outlook, it said.

"Higher OPEC production sits against a backdrop of tight end-2011 inventories, stubbornly high prices and persistent uncertainty over non-OPEC and Iranian supply for this summer," it said.

IRANIAN PRODUCTION

Oil-importing countries bought nearly 1 million b/d less crude from Iran in April and May than in late 2011 as a result of tightening sanctions against the country, the IEA said.

"Preliminary April and May data on imports of Iranian crude are nearly 1 million b/d below late-2011 levels, and close to the market impact we have assumed since sanctions were first tightened," it said.

"In months ahead, Iran may need to shut in production volumes if export markets remain similarly constrained and storage fills up," the IEA said.

However, the IEA said Iran had kept output steady in May at 3.3 million b/d compared with April.

"The full implementation of the most severe sanctions to date on Iran's oil and banking sectors is just weeks away, but so far it appears the National Iranian Oil Company has been able to maintain production in May at around 3.3 mb/d. Iran reportedly is offering longer credit terms to some customers, which effectively give buyers a price discount on its crude purchases," the IEA said.

"Implementation of full sanctions is assumed to ultimately lead to a [production] cut of some 1 million b/d in Iranian supplies in H2 2012 as storage tanks both onshore and offshore reach maximum capacity unless the country finds alternative outlets," it said.

A European Union embargo on the import of Iranian oil is due to come into effect on July 1, while the US is also implementing its own sanctions against Iran which aim to encourage the country's crude buyers to reduce their purchases from Iran.

"It appears that [Iran's] main European buyers have halved imports to around 300,000 b/d in May and reports suggest volumes are expected to be halted altogether by the July 1 EU embargo deadline, with a plentiful supply of alternative crudes available to the region's refiners," the IEA said.

European buyers have already increased imports of Iraqi Basrah Light crude to around 450,000 b/d in May, up from an average 100,000 b/d in the first four months of this year, it added.

DEMAND FORECAST TRIMMED

The IEA also trimmed Wednesday its estimates of world oil demand this year on recent signs that the deepening eurozone crisis may be hitting Chinese growth and slowing the pace of global economic recovery.

The IEA lowered its forecast for global oil demand in 2012 by 60,000 b/d to average 89.9 million b/d.

"Reports of a darkening global economic backdrop simply reinforce our already-cautious view on 2012 demand," the IEA said in its report. "Subdued global economic growth of 3.5%, well down on the near-5% expansion seen before the global credit crunch, continue to cap expected 2012 growth."

Citing preliminary April data, the IEA said it saw a "dramatic reversal" in China's oil demand, which fell 0.6% after a rise of 3.1% in March.

Chinese demand figures showed 9.5 million b/d of oil products were consumed in April, a drop of 55,000 b/d (or 0.6%) on the corresponding month a year earlier.

For the year as a whole, however, non-OECD demand is forecast to average 44.7 million b/d, up by 2.8% on the year, the IEA said.

On stocks, the IEA said OECD industry oil inventories rose by 17.3 million barrels in April, to 2.643 billion barrels.

It said the latest estimate puts OECD commercial oil stocks at 1.9 days above the five-year average and narrows the apparent deficit to the five-year average in absolute terms.

The IEA Wednesday also left its estimate of the call on OPEC crude in 2012 at 30.3 million b/d, well below its estimate of the group's current production levels.

In its latest monthly oil market report, the IEA said it expected the call on OPEC to rise from 29.4 million b/d in the second quarter of this year to 30.9 million b/d in the third quarter and 30.8 million b/d in the fourth.

According to the IEA, OPEC countries produced an average of 31.86 million b/d of crude in May, well above both their agreed production ceiling of 30 million b/d and the estimated call on OPEC.

--Staff reports, newsdesk@platts.com

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