Global oil demand is expected to grow at its fastest pace in five years in 2015, the International Energy Agency (IEA) said Wednesday, but lower oil prices and spending cuts will "take a toll" on producers outside the Organization of Petroleum Exporting Countries (OPEC).
While crude oil prices fell sharply during July and into early August, thanks to a glut of supply and a strong U.S. dollar, the IEA noted in its latest monthly report that it expected demand to pick up.
"Global oil demand in 2015 is expected to grow by 1.6 million barrels a day (mb/d), up 0.2 mb/d from our previous report and the fastest pace in five years, as economic growth solidifies and consumers respond to lower oil prices," the IEA said.
"Persistent macro-economic strength" supports above-trend growth of 1.4 million barrels a day in 2016, the IEA added.
Although demand is expected to rise, the IEA noted that the global oil supply also continues to grow at "breakneck speed" -- currently running 2.7 mb/d above a year earlier – despite the collapse in oil prices.
Global oil markets slumped last June from around $114 a barrel on the back of a glut in supply and lack of demand, caused by an uncertain global growth outlook. Over a year on, and benchmark Brent crude on Wednesday was trading at $48.95 a barrel and U.S. light crude around $42.98.
On Wednesday, crude oil prices fell again as China allowed its currency to fall sharply for a second day, triggering concerns over the country's economic health and the impact on oil demand.
What has made matters worse for oil prices is the decision by the OPEC, a 12-country oil producing group led by Saudi Arabia, not to cut their production ceiling of 30 mb/d, despite the slump in prices and demand.
It has even been exceeding that limit and in the organization's latest report, published on Tuesday, said its production reached a three-year high this summer and that its members produced 31.51 mb/d in July.
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OPEC's decision not to cut production has been widely seen as a strategy to defend its market share, rather than price, and at the same time put pressure on rival U.S. shale oil producers who have higher production costs than OPEC members.
The strategy looks to be having an effect on many non-OPEC producers with rigs in the U.S. closing and investment projects shelved while other producers have sought to dramatically cut costs.
The IEA said that world oil supply fell nearly 600,000 barrels a day in July, "mainly on lower non-OPEC output," and predicted that the growth rate of non-OPEC oil supply would keep declining.
"As lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 mb/d to 1.1 mb/d this year, and then contract by 200 kb/d in 2016."
"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. As such, non-OPEC supply growth is expected to decelerate through the end of the year and decline in 2016 – with the U.S. hardest hit."
The IEA believed that OPEC supply (and what it called "muscular pumping" from Saudi Arabia and Iraq) would only continue to rise, to 30.8 mb/d in 2016, up 1.4 mb/d on this year "due to a stronger demand outlook and stalling non-OPEC supply growth."
The agency said it could take time for a rebalancing of global supply and demand for oil to take place, meaning that, for now, oil stockpiles would continue to "pile up."
"Our latest forecast shows stronger-than-anticipated demand and non-OPEC supply growth swinging into contraction next year. 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."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.