Growth is expected to slow from 1.4 million barrels per day (m bpd) in 2016 to 1.2m bpd in 2017 as prices stabilise, the IEA said in its monthly Oil Market Report.
The price of crude oil settled at around $45 per barrel in August, as oversupply eased and demand growth weakened, the IEA said. Brent crude had threatened to drop below $40 per barrel at the end of July, it said.
The forecast for 2017 is 0.1m bpd below previous IEA estimates due to a "dimmer macroeconomic outlook", it said.
Global oil supply rose by 150m bpd in July to 33.39m bpd, as Saudi Arabia increased its output to its highest level ever and Iraq also increased production.
"Robust Middle East production lifted total Opec crude supply 680 thousand barrels a day above a year ago and held output at an eight-year high," the IEA said.
Global refinery output is likely to rise by 2.2m bpd in the third quarter of 2016 to a record 80.6m bpd. This is only 0.6m bpd above last years levels, showing lower growth than expected , and means that some of the stock that has built up since mid-2015 has now been reduced.
An "inventory overhang" in Organisation for Economic Co-operation and Development (OECD) countries continued to shift from crude into products, with commercial stock reaching a record 3.093 billion barrels, the report said.
The drop in stock of crude oil was offset by above-average growth in stock overall, with large volumes of US propane and other natural gases being added to stores.