The International Energy Agency (IEA) is confident that global demand for oil is on the rise, as an Opec-led output restraint deal works to rebalance the market, but warned more upstream investment is required to boost capacity.
Oil stocks are falling in comparison with their five-year average, although not as quickly as Opec had hoped, said Neil Atkinson, the IEA's head of oil markets division, who authors the Paris-based agency's closely tracked oil market reports.
Oil prices increased last week after the IEA revised its demand forecasts upwards with Brent crude gaining about 3.4 per cent to US$55.62 per barrel.
Opec and other producers struck an agreement in November last year to cut output by 1.8 million barrels per day (bpd) to stabilise prices and reduce a global supply glut.
Opec and other key oil producers are weighing a decision on extending their production cut agreement beyond March 2018, the deal's current expiry date.
The Opec deal has already been extended beyond the initial six-month scope, and into the first quarter of next year.
"Six months is a very long time in the oil world. We are in a situation at the moment where the producers have cut their production," said Mr Atkinson.
"We monitor this on a monthly basis and in the period from January to August as a whole, which is the period during which the deal has operated, they have achieved something like 86 per cent compliance, which is, by Opec's historical terms, pretty good."
Production in Libya and Nigeria, however, has grown significantly this year, which has diluted the impact somewhat, said Mr Atkinson on the sidelines of the International Institute for Strategic Studies' (IISS) Bahrain Bay Forum conference.
The success of the Opec restraint strategy comes as demand forecasts for the past year have been revised upwards.
The IEA is predicting that 2017 will be another strong year, estimating an average additional demand of 1.4 million bpd, driven by China and surprising resilience in Europe in particular, said Mr Atkinson.
Yet growth in oil production to meet such demand may be hampered by large falls in investment in the upstream oil and gas sector in the past two years, as a consequence of the oil price crash in 2014.
Investment in the upstream sector shows little sign of improvement in 2017, said Mr Atkinson.
"If oil demand continues to grow at the fairly solid rates as we expect and if there is not a return to significant investment growth at some point in the next two to three years there is the possibility that in five years the spare production capacity cushion which is all held within the Opec countries could be eroded to the extent there is very little spare capacity," he said. "We would be back to the situation where the market is very vulnerable to price spike interruptions."
Bahrain's oil minister warned the IISS conference yesterday that the oil industry will face a supply crunch if investment does not increase to match future demand, which is currently being underestimated.
Markets will need an extra 6 million bpd to keep up with global demand, which has been underestimated, said Sheikh Mohammed bin Khalifa Al Khalifa.
Overly-bearish forecasts of peak oil demand based on factors such as the adoption of electric vehicles, meant that investment levels were not where they should be.
"We will face a supply problem if we are not careful," said Sheikh Mohammed.
Mr Atkinson said there was little sign of peak demand having occurred in the short-term.
"Demand is fairly strong, that is one of the more interesting things we have picked off recently," he said.
He noted, however, that policy changes in countries such as China could impact the future growth in oil demand.
