Healthy production levels by OPEC will help balance oil markets next year as demand growth slows, the West's energy watchdog and OPEC said on Tuesday, in a rare agreement, a day ahead of a policy-setting meeting by the producer group.
The International Energy Agency said the Organization of the Petroleum Exporting Countries had raised output to its highest level in more than three years, and the oil producer group said it was now pumping more than might be required next year.
"Our base case is seeing a relatively balanced market next year if OPEC continues to produce at the levels they have been producing at over the last three or four months," said David Fyfe, head of the oil industry and markets division of the IEA.
OPEC meets on Wednesday in Vienna to agree output from its members, which pump more than a third of the world's oil, and is expected to aim for a production target of around 30 million barrels per day (bpd).
The IEA and OPEC clashed in June when the IEA predicted a steep rise in demand and called on OPEC to help replace lost Libyan output in order to avoid oil prices spiking further and damaging the global economy.
OPEC rejected the pressure and failed to agree new output targets, which resulted in the IEA releasing stocks and further angering OPEC.
Saudi Arabia unilaterally raised production and was pumping at the highest level for 30 years in November while the IEA has meanwhile repeatedly cut estimates for the global demand in 2012 as Europe's debt crisis has worsened.
"We think that the market for 2011 and 2012 now looks tight to balanced and there is the prospect of it easing somewhat after that," Fyfe said.
The IEA said its average call on OPEC crude for the first half of 2012 should stand at 29.35 million bpd versus 30.68 million bpd produced in November, which was a rise of 620,000 bpd on the back of higher Libyan and Saudi output.
Analysts from PMV brokerage said in a note that such a level of production by OPEC would not only mean comfortable supply but would also allow daily stocks to be replenished by 700,000 bpd.
OPEC gave a more modest but still very healthy estimate of its own production in November, when Libya, Saudi Arabia, Angola, Nigeria and Iraq pumped 30.37 million bpd.
The output figure for last month far exceeded the 2009 and 2010 yearly averages, according to data compiled by OPEC based on secondary sources.
Both OPEC and the IEA also trimmed oil demand growth forecasts for next year.
"Planned austerity measures, not only in the euro zone but also in other OECD economies; the slow-down in developing economies, particularly China and India; and the still weak economic situation in the United States are factors that warrant particular attention as downside risks," OPEC said.
OPEC revised down its forecast for 2012 demand growth by 100,000 bpd to 1.1 million bpd while the IEA, which has been cutting its 2012 oil demand growth forecast since July, said demand would grow next year by 1.26 million bpd, 40,000 bpd lower than its previous forecast.
For the whole of 2012, the IEA expects global demand for OPEC oil to be at 30.2 million bpd, a cut of 300,000 bpd from the previous report.
"Our preliminary medium-term update suggests a more comfortable market outlook than looked likely six months ago," the report said.
On the bullish side, the IEA said oil prices could spike if tighter sanctions were applied against OPEC member Iran while questioning the efficacy of a possible embargo imposed only by the European Union.
"A broader global embargo or wider-ranging restrictions on dealings with Iran's Central Bank might lead to a more significant rise in crude prices, but arguably might more effectively limit Iranian revenues," the IEA said.
It said EU-wide sanctions would force Mediterranean refiners to face higher crude prices from Saudi Arabia, Iraq and Russia, putting them under further competitive pressure as Asian buyers would obtain more Iranian oil at discounted prices.
Tighter and broader sanctions may result however in Iranian production capacity declining by 890,000 barrels per day (bpd) to just under 3 million bpd by 2016, the IEA said.
The latest proposals by the West would strengthen US and EU sanctions already in place that target Iran's upstream oil and gas sector by closing a loophole that will bar exports of oil related equipment, the IEA said.