The market could see a third successive year when supply will exceed demand by 1 million bpd and there will be "enormous strain on the ability of the oil system to absorb it efficiently", it said.
Global oil demand saw a 'flip' from a near five year high, or 2.1m bpd, in the third quarter of 2015 to a one year low of 1m bpd by the fourth quarter. Persistent oversupply of oil, exceptionally mild temperatures in early winter and negative economic news from China, Brazil and Russia all contributed to the reversal, the IEA said.
By mid January 2016 the price of crude oil hit a 12-year low, the IEA said, and the agency's January Oil Market Report predicts that demand growth will be only 1.2m bpd for 2016.
Global oil supplies grew by 2.6m bpd last year, but growth dropped to 0.6mb/d by December as non-OPEC production fell, the IEA said. This is the first time since September 2012 that non-OPEC production has fallen below that of the previous year, it said.
In OPEC countries, crude output slowed a little, by 90,000 bpd, but was still high at 32.28m bpd. However, now that sanctions have been removed, Iran says that it will boost its output by an immediate 500,000 bpd. The IEA estimates that an extra 300,000 bpd could be on the world market by the end of the current quarter, it said.
Neil Atkinson, head of the IEA’s oil market division told the Financial Times that "the exact pace of the flow is hard to tell, but Iran is showing they are back in the game".
"Saudi Arabia and others are going to ensure they don’t lose out. They are not going to give up the fight and say 'welcome back'. For all intents and purposes, this is a free market," Atkinson told the newspaper.
Storage infrastructure is likely to come under pressure in 2016, as global inventories rise, the IEA said. Global inventories rose by a notional 1 billion barrels in 2014-15, and the agency expects to see a further build of 285 million barrels over the course of 2016.
In a recent report, the Saudi Arabian National Commercial Bank (NCB) said that oil oversupply will continue and will keep oil prices at an average of $50 a barrel in 2016. OPEC members have continued to produce over the 30m bpd quota for the 18th month in a row, it said.
Saudi Arabia's oil production peaked at 10.6m bpd in June 2015, while Iraq has increased output over the year by around 700,000 barrels, reaching 4.2m bpd in November last year, the NCB said. The lifting of sanctions on Iran "is expected to bring an additional 600 thousand barrels a day" meaning OPEC countries together are likely to continue producing more than 32m bpd, it said.