By David Hodari

Just over a year after collapsing crude prices forced oil-exporting countries to enact historic production cuts, the supply glut that accrued during the most extreme pandemic restrictions has almost returned to normal levels, the International Energy Agency said Wednesday.

Those observations came in the IEA's closely-scrutinized monthly market report. The agency caveated them by cutting its 2021 global demand growth forecast by 270,000 barrels to 5.4 million barrels a day. Demand in Europe and the Americas in the first quarter was weaker than previously thought, the IEA said. The agency cut its second-quarter forecast for Indian demand as the country struggles with high coronavirus infection rates.

The Paris-based organization left its demand estimates for the second half of the year unchanged, adding that vaccination rollout programs, rebounding economic activity, and easing transport restrictions in the U.S. and Europe clear the way for crude demand to begin outstripping supply later this year.

The agency expects demand to outstrip supply even after the Organization of the Petroleum Exporting Countries and its allies ease their continuing output cuts. The IEA cut its already moderate supply growth forecast for non-alliance producers to roughly half the amount of last year's contraction, while also forecasting a further drop in U.S. production in line with OPEC's forecast this week.

The supply stocks held by the wealthy nations of the Organization for Economic Cooperation and Development slipped to 1.7 million barrels above its five-year average of 2016-2020, the IEA said. "Anticipated supply growth through the rest of this year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter," it said.

Oil prices edged higher on Wednesday, with Brent crude--the global benchmark--up 1% at $69.20 a barrel. West Texas Intermediate futures, the U.S. benchmark, were also up 1% at $65.95 a barrel after the American Petroleum Institute released weekly inventory data showing stocks dropped by roughly the amount previously forecast, according to ING analyst Warren Patterson.

Despite the IEA's forecast that the world will resume winnowing its glut of oil from next month, significant risks to the agency's outlook remain in both supply and demand. The market is currently oversupplied.

India continues its battle to keep coronavirus variants at bay. The subcontinent is currently experiencing more than 400,000 new cases a day and its struggle prompted the IEA to cut its second-quarter demand forecast by 13%.

Restrictions are easing and mobility is improving in other Covid-19 problem areas like Brazil, but India's example shows how fragile the post-pandemic economic recovery can be, the IEA said.

While the plans of OPEC and its allies to bring back millions of barrels of held-back supply in the coming months won't derail the oil market's tightening, the prospect of a rapprochement between the U.S. and Iran might mean millions of extra barrels of crude returning to the market.

Washington and Tehran are currently engaged in indirect negotiations to revive their nuclear deal and warmer relations might clear a path for the 2.4 million barrels Iran is currently producing to be freely traded.

Even accounting for Iranian barrels, OPEC+ would still be producing 1.7 million barrels of oil a day fewer than the rate at which the world is forecast to consume it in 2021's fourth quarter.

In line with some of the forecasts made by the agency and by OPEC over the past year, the IEA expects global oil demand to have almost returned to its pre-pandemic "normal" level by the end of this year. The organization expects demand in the fourth quarter to be 120,000 barrels a day fewer than it was in the same quarter of 2019.

Write to David Hodari by david.hodari@wsj.com

(END) Dow Jones Newswires

May 12, 2021 04:16 ET (08:16 GMT)

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