The IEA also said production by the Organization of the Petroleum Exporting Countries (OPEC) and its allies fell in August and compliance with their pact to cut supply to the markets increased.
OPEC and a number of other producers including Russia agreed last year on production cuts to ease a global supply glut, but prices have not risen much above $50 per barrel as compliance has been a problem.
But with oil demand perking up as well as hurricanes and regular summer maintenance knocking out some production, the IEA said it has seen some of that glut disappear.
Within industrialized countries that are members of the Organization for Economic Cooperation and Development (OECD) oil product stocks are now only 35 million barrels above the five-year average, the IEA said in its monthly report.
Industry and government oil product stocks stood at 1,796.3 million barrels in July in the 34 countries that make up the OECD.
“Depending on the pace of recovery for the US refining industry post-(Hurricane) Harvey, very soon OECD product stocks could fall to, or even below, the five-year level,” added the IEA.
“Based on recent bets made by investors, expectations are that markets are tightening and that prices will rise, albeit very modestly.”
Looking at recent developments in the oil futures markets, the IEA called them “a sign that oil markets have started to rebalance.”
On Tuesday, OPEC, in its monthly report, also pointed to a decline in its production in August as a sign that supply and demand could be moving further toward balance.
“It is clear that the rebalancing process is under way, supported by the high conformity levels of OPEC member countries and participating non-OPEC countries to the production adjustments” in the cooperation agreement, OPEC Secretary-General Mohammed Barkindo said in a speech in Oxford on Monday.
The IEA said OPEC crude production fell in August for the first time in five months, thanks to both cuts in production as well as a flare-up in turmoil in Libya disrupting output. Compliance with agreed production cuts among the 12 members bound by the pact rose to 82 percent from 75 percent in July.
The 10 non-OPEC producers that are part of the supply cut pact also cut production by 270,000 barrels per day in August from July, and their output is now 640,000 barrels per day, their pledged level.
Speaking of Hurricane Harvey, which in August struck the US Gulf Coast, the location of significant refinery and export operations, the IEA said the impact should be brief.
“As far as Harvey is concerned, disruption to local oil markets in the US Gulf Coast is easing on a daily basis and its impact on global markets is likely to be relatively short-lived,” said the agency, which advises the OECD on energy markets.
The IEA also raised its forecast for growth in global oil demand after thirst for crude “grew very strongly year-on-year” in the second quarter of 2017.
It now sees global oil demand increasing by 1.6 million barrels per day (mbd), to 97.7 mbd on average this year, thanks to brisk consumption in Europe and the US.
Oil prices rose after the report was published, with Brent crude adding 10 cents to $54.37 per barrel around 8:20 a.m. GMT.