By Zaida Espana
LONDON (Reuters) - Increased output from OPEC coupled with sluggish demand could see the oil market turn a corner, the International Energy Agency (IEA) said on Thursday.
The combination of these factors has led to a potential global build in stocks of 1 million barrels per day (bpd) over the last quarter, the agency said in its monthly report.
"The cycle of repeatedly tightening fundamentals since 2009 has been broken for now," it said.
The IEA, which advises 28 industrialized nations on energy policy, said prospect of a potential oil stock release, together with a pledge from top oil producer Saudi Arabia to supply clients ahead of negotiations with Iran, had seen prices temper some recent gains.
"Easing first quarter 2012 fundamentals have seen prices recently lose most of the $5 per barrel they gained in March. The muted impact so far is partly because much of this extra supply has been stockpiled on land or at sea," said the IEA.
Brent crude futures rose to highs not seen since 2008 of $128.40 a barrel in early March, but have since given up those gains to trade at around $120.10 by 0920 GMT.
The IEA said it was not surprising that extra barrels were being sent into storage in the typically slacker demand period of March and April, even if the backwardated pricing structure made storing less lucrative.
Analysts said that while the report initially suggests a well supplied market, concerns about replacing Iranian crude without denting spare capacity or hurting inventories remain key.
"At an initial level report appears to present a market that is well supplied ... but if you look closely, concerns around Iran and fact that stocks are still low remain key issues," said Gareth Lewis-Davies, energy commodity strategist at BNP Paribas.
"If you have to replace Iranian oil we can do that but at the cost of spare capacity, and then given OECD stocks are low by historical standards there is less slack in system."
Inventories in the OECD industrialized nations saw a weaker-than-average draw of 12.4 million barrels in February to 2.63 billion barrels, according to the IEA.
Although stockpiles remain below five-year average, the smaller draw means the deficit narrowed to 13.9 million barrels from 40.4 million barrels in January.
"It is a moderately bearish report. We don't see much tightness in the market. Inventories have risen and demand is sluggish," said Samuel Ciszuk, Middle East and North Africa analyst at KBC Energy Economics.
"The IEA sees non-OPEC supply gradually balancing out the recent supply losses. We are basically back to the situation we saw before Libya erupted."
On the supply front, output from the Organization of the Petroleum Exporting Countries (OPEC) was near a three-and-a-half year high of 31.43 million barrels per day in March, up 135,000 bpd from the previous month.
"I think again the IEA report illustrates that there is plenty of oil in the market at the moment. There is no shortage There is too much - a physical oversupply," said Commerzbank oil analyst Carsten Fritsch.
The increase was driven by Iraq, Libya and the United Arab Emirates, while Saudi Arabian production stood at 10 million bpd, more than offsetting reduced Iranian and Angolan supplies.
Top oil exporter Saudi Arabia has hiked output to around 10 million barrels per day (bpd) in April, up about 100,000 bpd on the month, and the country's oil minister said on Thursday the kingdom would pump more if needed.
Output of 10 million bpd would be the highest since November, when the kingdom pumped more than it had done for decades, as it seeks to reassure markets.
Investor concerns about mounting tensions with Iran have propped the price of crude so far this year. According to the IEA, Iranian production in March fell by a further 50,000 bpd to 3.3 million bpd, to stand or about 250,000 bpd below pre-sanction end-2011 levels.
Offtake of Tehran's crude by traditional buyers could drop by between 800,000 to 1 million bpd this summer, the IEA said, citing latest available information.
Near-record high production from OPEC could help offset a dip in supplies from non OPEC countries. Production from non-OPEC countries fell in March by 500,000 bpd led by the UK North Sea and synthetic crude plants in Canada.
For the rest of the year, the agency retained its forecast for oil consumption growth of 800,000 bpd, barely changed from last month's forecast.
However, it warned that prices could remain volatile if the geopolitical tensions, including the dispute over Iran's nuclear program continue to mount.
"We cannot discount the possibility that prices will remain high so long as geopolitical uncertainties remain," the IEA said.
(Additional reporting by Christopher Johnson and Julia Payne; Editing by James Jukwey)