LONDON- The world's spare oil production capacity which helps smooth the market will fall by the end of 2022 as OPEC+ producers lift output, highlighting the need for more investment to meet rising crude demand, the International Energy Agency said on Thursday.

The IEA said in its monthly oil market report that OPEC+ spare capacity could fall to below 4 million barrels per day (bpd) in the fourth quarter of 2022 from 9 million bpd in the first quarter of 2021. It forecast global demand at 99.6 million bpd in 2022, slightly above pre-pandemic levels. 

Spare capacity is an important cushion for the oil market as it allows producers to quickly respond to unplanned outages that could tighten the market and cause big fluctuations in prices.

Spare capacity will be concentrated in Middle East producers Saudi Arabia, the United Arab Emirates, Iraq and Kuwait, the IEA said, while Russia would be pumping flat out in the fourth quarter of 2022, based on capacity of 10.45 million bpd.

"Shrinking global spare capacity underscores the need for increased investments to meet demand further down the road," it said, after the demand cratered during the pandemic, prompting many producers to push back or scrap plans to add capacity.

The IEA defines spare capacity as production that can be tapped within 90 days and sustained for an extended period.

Others use different definitions. The U.S. Energy Information Administration sees OPEC spare capacity at 5.11 million bpd in the fourth quarter of 2022, based on output that can start up in 30 days and be sustained for at least 90 days.

Spare capacity becomes increasingly important with crude inventories shrinking as OPEC+ continues with its output cuts.

The IEA said oil stocks would continue to slide as OPEC+ was on track to pump 700,000 bpd below the call for its crude.

But it said OECD oil inventories could build again in 2022 and Iranian oil output, now limited by sanctions, could rise.

It said inventories could build by 800,000 bpd in the first quarter of 2022, 2.1 million bpd in the second quarter of next year and 2.4 million bpd in the second half of 2022.

The IEA said that, if Iranian sanctions were eased, the OPEC member could swiftly add 1.3 million bpd to global supply.

(Reporting by Ahmad Ghaddar; Editing by Edmund Blair) ((Ahmad.Ghaddar@thomsonreuters.com; +442075424435; Reuters Messaging: ahmad.ghaddar.thomsonreuters.com@reuters.net))