By BENOÎT FAUCON  Updated Oct. 13, 2015 9:18 a.m. ET  wsj.com

Forecast based on likely slowdown in demand growth and expected return of Iran to oil markets

The world’s oil markets will likely remain oversupplied next year, as demand growth slows amid an expected return of Iranian oil, a top energy forecaster said Tuesday.

In its closely watched monthly oil market report, the International Energy Agency—which represents some of the world’s largest oil consumers—cut its forecast for oil demand growth for next year by about 200,000 barrels a day compared with its previous assessment in September.

The agency now sees world oil consumption rising by 1.2 million barrels a day in 2016; in 2015 the figure is forecast to reach 1.8 million barrels a day, a five-year high.

“A projected marked slowdown in demand growth next year and the anticipated arrival of additional Iranian barrels-—should international sanctions be eased—are likely to keep the market oversupplied through 2016,” the agency said.

The IEA’s report comes during a period of uncertainty for oil markets. After three years of global prices averaging above $100 a barrel, the market collapsed late last year as surging American production flooded the world with new supplies of oil. Then, OPEC abandoned its traditional role of cutting supplies in times of market turmoil, hoping that low prices would undercut high-cost producers.

The result has been a volatile year for prices, which have gone lower than $44 a barrel for Brent crude, the international benchmark. On Tuesday, Brent was trading steady at about $50 a barrel.

The IEA report focused on a piece of the oil-price puzzle that is difficult to pin down: demand. Future demand growth is often hard to predict because it often depends on how warm the winter months are and economic patterns in developing countries like China and India, where data isn’t always straightforward.

This year, there has been exceptional growth in oil demand, with the IEA pegging the figure at 94.5 million barrels a day in 2015, versus 92.7 million last year.

The growth has been driven largely by China and the U.S., where oil-product demand is estimated to rise by 4.9% and 2.2% this year respectively—thanks to a combination of lower prices and still-robust economic growth.

However, this year’s rising demand has been more than offset by resilient U.S. production, rising OPEC output and bulging inventories—a combination of factors that has kept oil prices low throughout the year.

The IEA’s demand prediction for 2016 is less optimistic than OPEC’s demand growth estimate of 1.25 million barrels a day. In its report Monday, OPEC said falling production from the U.S., Russia and other non-OPEC producers would help bring the market into balance.

But the IEA said a global oil glut could be sustained next year by OPEC’s own relentless production and more than 200 million barrels in surplus oil that have been stored during this period of low prices.

The slackening supplies could be taken up by Iran, which can freely export oil next year if western sanctions are lifted on schedule. Iran’s production could ramp up to 3.6 million barrels a day from 2.9 million barrels a day currently, the IEA said.

The IEA also said it doesn’t expect OPEC—now pumping near-record levels of 31.7 million barrels a day—to adjust its output when Iran returns. The agency expects rival producers Iraq and Saudi Arabia to keep pumping at record levels—with OPEC overall seen, in the near future, producing at least 400,000 barrels a day more than is needed next year.

Further, the IEA said, commercial stocks in industrialized nations extended recent gains and rose by 28.8 million barrels in August, bringing inventories’ surplus to average levels of 204 million barrels.

DNB, the Norwegian financial services firm, called the IEA report “slightly bearish.”

Sanford C. Bernstein Research, which has been bullish on oil, said the IEA demonstrated that 2015 would be oversupplied, but cited the drop in non-OPEC supplies—500,000 barrels a day—as “the biggest decline since 1992.”

“The picture for 2016 and beyond is becoming very favorable for pricing strength,” Bernstein said.

 

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