In its June monthly report, the adviser to 26 industrialised countries lifted its forecast for 2007 growth in world oil demand to 1.7 million barrels per day (bpd) or two percent, up 200,000 bpd from the previous forecast.
The report marked the fourth month running the Paris-based agency has urged the Organization of the Petroleum Exporting Countries to open the taps to lower prices that are close to $70 a barrel, up from about $50 in January.
"We would very much hope that OPEC production is at its seasonal low at the moment," David Fyfe, analyst at the IEA, told Reuters by telephone. "We definitely do need more crude oil."
The increase in the IEA's demand forecast reflects revisions to 2005 data and higher-than-expected demand in countries including Nigeria, Indonesia, Singapore, Venezuela and former Yugoslavia.
Analysts said the report underscores a trend for rising oil demand, despite high prices, in countries outside the OECD group of industrialised nations, where rapid economic growth is boosting living standards.
Barclays Capital said that should the IEA be right, by the end of this year non-OECD demand will have risen 3.6 million bpd since 2004, while OECD consumption expands by just 300,000 bpd.
"The message is that oil demand has been much stronger than people thought it was and OPEC production is not high enough," said Kevin Norrish at Barclays. "OPEC needs to raise production fast or oil prices will continue to rise."
Oil pared losses after the IEA report was released and later eased amid expectations for rising U.S. fuel stocks. Brent crude was down 96 cents at $68.60 at 1427 GMT.
INVENTORIES MAY FALL
Fuel inventories in countries that are members of the OECD fell in the first quarter as the impact of OPEC supply cuts kicked in.
While inventories rose by 9.9 million barrels in April, the IEA warned the trend may reverse should the 12-member OPEC maintain production close to current rates.
If the group pumps around 30.3 million bpd -- or 200,000 bpd more than the IEA estimates they produced in May -- stocks could drop by 1 million to 1.5 million bpd in the third quarter, the report said.
"This would push forward stock cover down towards the low levels seen when prices accelerated higher in 2004. That is, by itself, a concern."
OPEC, source of more than a third of the world's oil, agreed last year to lower output by 1.7 million bpd and officials from the group say they are supplying enough to meet demand in the 86.1 million bpd world market.
The 10 members covered by the deals, all except Iraq and new member Angola, pumped 26.5 million bpd in May, the IEA said, 1.2 million bpd less than in September 2006 -- the month used as a baseline for the supply cuts.
The IEA cut its estimate of 2007 non-OPEC supply by 110,000 bpd to 50.2 million bpd, citing lower than expected output from the OECD and African producers such as Equatorial Guinea.
The rise in demand and drop in supply will raise the need for OPEC oil in 2007 to between 31 million bpd and 32 million bpd, it said, up to 500,000 bpd more than previously expected.
OPEC insists supply is enough and says a strain on oil refineries in the United States and other consumer countries, as well as violence in Africa's top exporter Nigeria, have pushed prices higher.
Iran's Oil Minister Kazem Vaziri-Hamaneh said on Monday there is no shortage of crude oil in the market and OPEC has no plans to increase supplies.
OPEC meets next on Sept. 11 to set supply policy and has ruled out a need to gather before then.