The eurozone debt crisis, a Chinese slowdown and increased supply depressed oil prices in May but despite fears of a sharp drop, they still remain high and are hurting growth, the IEA said on Wednesday.
Recent falls "accelerated in May in the wake of the deepening eurozone crisis, mounting concern over a slowdown in Chinese growth and rising global oil supplies," the IEA said in its latest monthly report.
At the same time, however, "prices remain very high in historical terms and are acting as a drag on household and government budgets," it cautioned.
The comments come as the Organization of Petroleum Exporting Countries meets in Vienna on Thursday when it is widely expected to leave its production ceiling unchanged at 30 million barrels per day.
OPEC current produces nearly 32 mbpd and there are sharp differences within the cartel, which supplies nearly a third of global oil, over what should be done given prospects of a price collapse.
Hardline Venuzuela warned on Wednesday that the economic slowdown "has turned a collapse in oil demand into a clear and present danger," while Ecuador and Libya also voiced concern but did not call for a cut.
Venezuela Energy Minister Rafael Ramirez told an oil conference in Vienna that a price of $100 per barrel "represents the minimum necessary" for the industry, after calling on Tuesday for Gulf producers to cut output.
Oil prices have fallen sharply and Brent crude -- the European benchmark -- slumped below $100 for the first time for 15 months in May, the IEA noted.
In early trading on Wednesday, New York's main contract, light sweet crude for delivery in July, eased 30 cents to $83.02 while Brent North Sea crude for July shed 12 cents to $97.02 a barrel.
"Resurgent worries over the eurozone crisis ... (and a) precarious macroeconomic outlook heightened risk aversion ... and triggered a massive liquidation" of investor positions," the IEA said.
Policymakers are focused on managing the crisis in Greece and Spain, it said, and the European Central Bank and the US Federal Reserve were notably reluctant to adopt more stimulus measures, undercutting sentiment, it added.
The International Energy Agency, set up to advise developed countries on energy policy, said it was possible that lower demand could lead to lower prices which would then bolster growth but the uncertain outlook required it to be cautious, with risks to the downside.
Accordingly, the IEA cut its 2012 global demand forecast to 89.9 million barrels per day (mbpd) from the 90 mbpd given in its previous report, and compared with global supply in May of 91.1 mbpd, up by 0.2 mbpd.
Compared with May 2011, global supply was up 4.2 mbpd, 70 percent of which was accounted for by OPEC.
The IEA put OPEC May output at 31.87 mbpd, slightly lower than in April but still well above its nominal target of 30 mbpd, with production at OPEC kingpin Saudi Arabia down slightly, along with Iraq.
Saudia Arabia, which says it could hike production, would likely keep output at around 10 mbpd in coming months and so cover any shortage if Iranian output is cut by Western sanctions imposed over its contested nuclear programme.
Iran produced 3.3 mbpd in May, the IEA said, showing little impact so far from the increasingly tough Western sanctions which Tehran has at least offset in part by offering customers easier payment terms.
The sanctions, however, should ultimately cut output by about 1.0 mbpd in the second half of the year as storage facilities are filled, forcing Iran to cut back unless it can find other outlets, the report said.
The IEA said concerns over Iran have eased, with the market more confident that it can cope with any reduced supply in view of increased output elsewhere and the recent fall in prices, which now appear to be near bottom.
Libya produced 1.42 mbpd in May, up 20,000 barrels, as the country continued to recover production lost last year in the uprising against Moamer Kadhafi.
Countries outside the Organization of Petroleum Producing Countries produced 53.1 mbpd in May, up 0.2 mbpd from April and up 1.0 mbpd from a year earlier but stoppages will see the 2012 gain trimmed back to 660,000 bpd, the IEA said.