Rising oil supplies will mostly offset higher demand expected over the next five years, the International Energy Agency said on Wednesday in its latest medium term outlook.

But while demand was forecast in 2009 to grow by 0.9%, this report says it will grow 1.4% a year out to 2015.

That's probably more a reflection of the greater confidence in major western economies about growth and the economic outlook, as well as the undoubted stronger growth in developing economies, especially China and India, which will be the major influences on demand in the next five to 10 years (at a minimum).

The IEA medium term outlook shows a supply-demand picture that will hardly change this year and next; but the spare capacity in the industry will begin to shrink by 2015.

Gas markets, which have been characterised by a glut, will stay very well supplied in the next few years, which means that those people expecting a bonanza in export income from the coming rise in Australian LNG exports, had better think again.

"For the next few years, the oil market is marked by more comfortable spare capacity than envisaged last year, and the duration of the current gas glut is set to last beyond 2013, at least in some regions. Yet, we shouldn't be complacent," the Paris-based IEA said in its latest medium-term market report.

"Higher prices, lower costs and fledgling signs of increased upstream spending have eased some of last year's concerns about medium-term oil supply prospects," the IEA said.

The agency raised its oil demand growth outlook to an average 1.4%, or 1.2 million barrels per day (bpd), every year from 2009 to 2015 on the back of the very strong demand from emerging markets, taking total demand to 91.9 million bpd by 2015.

The previous medium-term outlook in June last year was for average demand growth of 540,000 bpd per year in 2008-2014 -- a forecast which included 2009's large fall in demand due to the worst global recession in 60 years.

The 2015 growth projection is based on annual economic growth of 4.5% from this year, which implies the IEA sees much higher growth around the world from 2013 onwards because most projections till then fall just short of the 4.5% figure.

Under a scenario of lower average economic growth of 3% a year, oil demand would grow by around 1% a year.

Global oil supply is forecast to rise from 91 million bpd in 2009 to 96.5 million by 2015, mainly led by production outside the Organization of the Petroleum Exporting Countries.

Non-OPEC oil supply will increase to 52.5 million bpd by 2015 from 51.5 million bpd last year, the IEA said.

"More optimistic outlook as 2009 supply came in stronger than expected -including Russia, Colombia, North Sea & Mexico," the IEA said about non-OPEC sources.

"Future growth comes from Canadian oil sands, biofuels, Brazil, Colombia and Caspian; strong decline in North Sea, US, Mexico."

And there will be a decline in crude (-1.0 mb/d) offset by increases in biofuels (+0.8 mb/d), NGLs (+0.7 mb/d), other unconventional oils.

Spare capacity among the Organisation of the Petroleum Exporting Countries could start falling by 2011.

The IEA said it sees new OPEC capacity arriving from 2014, but supply may not keep pace with demand and the IEA said there could be "jittery" markets ahead.

The effective spare capacity of the OPEC producers will fall to 3.6 million bpd, or about 3.9% of world oil demand, in 2015 from 5.83 million bpd this year, despite new capacity appearing around 2014 in OPEC states.

The IEA said it expects a strong rise in oil demand in China, India and the Middle East, but weaker or no growth elsewhere, particularly in Europe.

"Oil and gas markets are starting to show signs of recovery, but the impact of the recession differs across regions, and the outlook remains very uncertain," Nobuo Tanaka, executive director of the IEA, said in a statement.

But the big unknown is the impact of BP's massive oil spill in the Gulf of Mexico.

No one knows what the impact will be on US supplies, or production costs, although all commentary is that it will cost companies more to produce oil from deepwater around the world, even though there are no bans outside the US.

The IEA did warn that that supply risks abound.

"First, there is the ever-present threat of geopolitical disruption surrounding a number of key Opec producers.

"Second, the potential of the BP spill could delay "substantial deepwater developments which underpin much of the expected supply growth".

The IEA said the price projections were based on prices averaging $US85/bbl for later years in the forecast period and "in real terms, $US76/bbl on average for the outlook period."

Prices are around $US76 a barrel now, which based on a sub-2% inflation rate (and lower inflation to come in the period), means oil prices might trade in a very tight range for some time to come.

Of course the value of the $US will be a big driver as well.

The IEA also published its outlook for the natural gas market.

Natural gas demand will pick up in countries belonging to the Organisation for Economic Cooperation and Development OECD), returning to 2008 levels by 2012, the agency said.

The Agency pointed out that the biggest influence for gas was the US gas industry, especially so-called unconventional gas.

The IEA said US Gas Output will be an "a global game changer".

The "United States have become the largest gas producer in 2009 -594 billion cubic metres (bcm) in 2009, despite low prices and a drop in the number of rigs and US gas production continues to increase in 2010

"These changes have had regional and global consequences on, LNG imports, Future infrastructure investments, Interest in unconventional gas resources in other regions."

"Australia is the most advanced (Coal Based Methane to LNG projects), Asia (China) has ambitious targets for CBM and shale gas."

"The outcome is more uncertain in Europe due to environmental questions, availability of rigs, workforce, transport infrastructure."

"China is seen as an area of strong growth, with demand doubling to 140 billion cubic metres (bcm) by 2015 compared to 2007 now seen as a conservative forecast," the IEA said.

"This would make China a bigger gas user than any OECD country bar the United States, with suppliers including Turkmenistan, Qatar, Australia, and soon Myanmar, supplementing local output.

"The oil supply outlook shows a marked improvement from a year ago."

"While non-OPEC supply continues to grow slowly, OPEC crude and natural gas liquids account for the bulk of the 5.4 mb/d of production growth to 2015."

For gas, two major supply trends dominate, according to the Agency.

"The rise of non-conventional gas, first described in our 2008 review, has continued apace, making the United States the world's biggest gas producer in 2009.

"The increase in liquefied natural gas (LNG) capacity means that a wave of new gas supplies will hit markets over the next few years totalling in excess of 120 bcm per annum, a 50% increase over 2008, and bringing important linkages between regions.

"This oversupply of gas put strong downward pressure on prices."