The International Energy Agency hiked its medium-term price assumption by $15-$20 per barrel, with an average price of $103 per barrel now underpinning its forecasts. Given diminished supply flexibility in the global market "the bull run evident since autumn 2010 ... looks in large part to be justified by supply and demand fundamentals," the IEA said in a report. Moreover, "despite increased upstream activity levels and resurgent non-OPEC supply, spare capacity has diminished." It forecast both oil prices and demand to increase over the medium term due to rising demand from emerging markets, with China alone expected to account for over 40 percent of the increased demand. "Income outstrips high crude prices in the growth markets in the face of persistent, if gradually diminishing, end-use price subsidies," noted the IEA, the energy policy arm of the 34-member Organisation for Economic Cooperation and Development (OECD). While per-capita oil use levels will remain lower than in the OECD, it said demographics, urbanisation and industrialisation will "push demand in the emerging markets sharply higher." The IEA said countries with per-capita annual income of $3,000-$20,000 will account for nearly half of global demand by 2016, roughly double the level of two decades ago. The IEA nudged up its global oil demand forecast for 2011 from its previous monthly report by 0.1 million barrels per day (mbd) to 89.3 mbd. It sees demand rising to 90.63 mbd in 2012, an increase of 0.6 mbd from its previous forecast in December. The IEA now forecasts demand to rise to 91.92 mbd in 2013 (+0.74 mbd), 93.13 mbd in 2014 (+0.83 mbd), 94.24 mbd in 2015 (+0.85 mbd) and 95.26 mbd in 2016. In Singapore trading earlier on Thursday, the price of New York's main contract rose 47 cents to $95.28 a barrel, while London's Brent North Sea crude gained 96 cents to $113.97. The IEA sees the oil market as being particularly tight this year and next, with the spare capacity of the OPEC oil cartel falling to 3.5-3.7 percent of global demand, although this is expected to ease somewhat later. Sustained high crude prices have boosted upstream activity, the IEA noted, with active new projects more than sufficient to offset declines in older fields, with global capacity expected to rise from 93.8 mbd to 100.6 mbd by 2016. However, it noted that most of this new oil was from more expensive areas to drill. Last week, the IEA expressed disappointment with OPEC's decision not to boost output quotas given persistently high prices, supply shocks and rising seasonal demand, which it said threatened to undermine economic recovery. It urged OPEC producers to pump above quota, and its latest monthly data noted that the 11 cartel members in the quota system produced 26.50 mbd, an increase from 26.38 mbd in April, and considerably above the 24.84 mbd target. While high prices will ultimately lead to a correction, the IEA warned that slower global growth might not bring that much supply respite given higher investments needed to bring oil to market. "In a lower-growth world, project slippage, together with potentially slower OPEC investment, might keep markets tighter than" forecast models suggest, it said. Emerging markets are expected to sustain considerable demand growth of around 1 mbd in any case.

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