EM currency crash ‘could hit oil demand’: IEA

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The sun sets over an oil refinery in Saudi Arabia.

The recent crash in emerging market currencies could hit global oil demand if it continues, the International Energy Agency (IEA) warned on Thursday, as it forecast an improvement in oil supply over the coming months.

Emerging markets have been pounded in 2013 amid speculation of an end to the U.S. Federal Reserve's bond-buying program, with currencies from countries including India, Turkey, Russia and Brazil coming under intense pressure. As oil is priced in dollars, depreciation in an oil-importing country's currency versus the dollar means the cost of importing oil for that country will rise – and could result in a reduction in demand.

"The rapid depreciation of many emerging market currencies since 1Q13 (first quarter of 2013), if sustained, may adversely affect oil demand," the Paris-based agency said in its September oil market report.

(Read more: Emerging market currency crash: Who's to blame?)

"Given the scope of recent currency depreciation, coming on top of already high oil prices in dollar terms, the latest currency movements may translate into lower oil consumption over time."

The IEA, which represents 28 member countries, said this currency depreciation versus the dollar would make it harder for emerging market governments to protect consumers against price volatility through domestic oil price subsidies.

"Pressures will accordingly mount to curb subsidies in such cash‐strapped economies, dimming long‐term demand prospects," the agency said. It revised down its oil demand forecasts for the hardest‐hit counties - India, Indonesia, Malaysia, Peru, the Philippines and Thailand - and said emerging market demand would slow to grow at 2.6 percent year-on-year in the second half of 2013, down from a five-year average of 3.6 percent.

(Read more: India central bank intervenes aggressively to support rupee)

"Should currency depreciation continue/widen, the adverse demand effect will be more significant," the IEA warned.

Stronger-than-expected deliveries in July helped offset this currency fluctuation, it said, and maintained its 2013 forecast for global demand at 895 kb/d (1,000 barrels per day). For 2014, the agency expects demand to pick up to 1.1 mb/d (1,000,000 barrels per day) in 2014, "as the underlying macroeconomic situation improves."

On the supply side, the IEA said a production hike in Saudi Arabia – to a 32-year high – and higher output from a number of other Middle East countries helped offset a near total shut‐down of Libyan production amid labour disputes, civil unrest and political discord.

(Read more: Syria's oil supply decimated as demand grows: OPEC)

"Global crude supply – notwithstanding the Libyan problems – looks set for an upward jump in 4Q13 (fourth quarter of 2013), thanks to a heady mix of seasonal, cyclical, political and structural factors," it said

But the agency did warn over the ongoing the geopolitical situation in Syria amid fears of contagion to other oil-producing countries.

"A western military strike against Syria, if it were to occur, would have no direct impact on physical crude oil supplies but the threat of an action has sparked market fears that the conflict will spread in the region," the IEA said.

—By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop