Tension on the oil market may be easing, the IEA said on Thursday in a report offering some hope for the global economy, but sanctions could cause production by Iran to "plummet".
Oil prices have been on a rising trend since late 2009, when the world economy began to recover from the financial crisis, to the point where many analysts say they could now derail growth.
Prices hit 2011 highs again in March but have since fallen, the International Energy Agency said in its latest monthly report, with its 2012 oil demand growth forecast unchanged at 0.8 million barrels per day (mbd) to 89.9 mbd.
In its previous report in March, the IEA had warned of "a heady brew of both real and anticipated supply-side risks," chief among them concerns over Iran's nuclear programme, but this time it believed the pressures were easing.
"Acknowledging that data remain preliminary, first quarter 2012 fundamentals nonetheless show a clear shift from the seemingly relentless tightening evident over the prior 10 quarters (from third quarter 2009)," it said.
It said an increase of 1.2 mbd in OPEC supply compared with the level in the fourth quarter of 2011 implied a significant 1.0 mbd increase in stocks.
"Together with Saudi supply assurances, market speculation on a potential strategic stock release and hopes pinned on multilateral talks over Iran's nuclear programme, easing ... fundamentals have seen prices recently lose most of the $5 (per barrel) they gained in March."
The increase in stockpiles may mean that "the cycle of repeatedly tightening fundamentals evident since 2009 has been broken for now," it said.
"We cannot discount the possibility that prices will remain high so long as geopolitical uncertainties remain.
"Further surprises almost inevitably lurk around the corner for both demand and supply. But for now at least, the earlier tide of remorseless market tightening looks to have turned," the IEA added.
If that turns out to be the case, it will be a welcome relief after a series of weaker US, Chinese and European data undercut hopes on the economic outlook.
On Wednesday, the US Federal Reserve warned that higher petrol (gasoline) prices were clouding the outlook by crimping consumer spending, a key driver of economic growth.
Against this backdrop, Iran remains a major uncertainty amid speculation Israel could launch an attack on its nuclear facilities, sparking a major crisis which would send oil prices soaring.
Iran is due to meet officials from Britain, China, France, Germany, Russia and the United States this weekend for talks about its nuclear programme, promising to present "new initiatives" after previous sessions got nowhere.
In the meantime, Western sanctions are biting ever deeper on Iran, the IEA said, and its oil output could "plummet" in coming months.
Iran's March oil production was down 50,000 bpd to 3.3 mbd -- some 250,000 bpd below pre-sanction levels at end-2011, it noted.
Now, "the long list of countries planning to implement import cuts in coming months suggests Iranian output could plummet to 2.6-2.8 mbd by mid-summer, unless alternative buyers can be found," it said.
Oil prices were firmer early on Thursday after losses earlier in the week as the weaker data compounded concerns over the eurozone debt crisis.
New York's main contract, West Texas Intermediate crude for delivery in May was up 41 cents to $103.11 per barrel while Brent North Sea crude for May gained 27 cents to $120.45.
"Prices were broadly supported by some renewed economic optimism and risk appetite in Europe," said Sanjeev Gupta, head of the Asia-Pacific oil and gas practice at Ernst and Young.
"Crude markets remain broadly balanced with supply worries being effectively countered by demand worries, particularly with regard to the US and Europe."