IEA sees oil glut persisting despite soaring demand

World oil demand is expanding at its fastest pace in five years thanks to rebounding economic growth and low prices, but global oversupply will last through 2016, the West’s energy watchdog said.

The International Energy Agency (IEA) said in a monthly report that it was steeply raising its demand growth outlook for this year and 2016, and expected non-OPEC supply growth to decline next year, with U.S. producers hardest hit.

“While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016 – suggesting global inventories will pile up further,” the Paris-based IEA said.

The view from the IEA chimes with that of the U.S. government, which last week lowered U.S. production forecasts, signalling that a 60 percent rout in benchmark prices since last summer may finally be weighing on shale output.

Oil prices have fallen to below $50 per barrel, pressured by an abundance of supply and a strong dollar. The views from the IEA are more bullish than those of OPEC, which on raised its forecast of oil supplies from non-member countries.

The IEA said it saw global oil demand rising by 1.6 million barrels per day (bpd) in 2015, up 260,000 bpd from its forecast last month, citing solid economic growth and consumers responding to lower prices.

“That’s the biggest growth spurt in five years and a dramatic uptick on a demand increase of just 0.7 million bpd in 2014,” it said.

It added that persistent macroeconomic strength will support above-trend growth at 1.4 million bpd in 2016, up 410,000 bpd from its previous forecast.

The decline in crude prices has prompted oil companies to cut their investment plans.

“While a drop in costs and efficiency improvements will help to offset some of the spending cuts, output is likely to take a hit soon,” the IEA said.

The IEA said it saw non-OPEC supply growth slowing sharply from a 2014 record of 2.4 million bpd to 1.1 million bpd this year and then contracting by 200,000 in 2016 – with the United States hardest hit.

The prediction signals that OPEC’s strategy of not cutting output, and hurting rival producers instead with lower prices, might be finally working.