World oil supply rose by 0.5 million barrels a day in January as production from members of the Organization of the Petroleum Exporting Countries increased to a two-year high, the International Energy Agency said Thursday.

World oil supply rose by 0.5 million barrels a day in January as production from members of the Organization of the Petroleum Exporting Countries increased to a two-year high, the International Energy Agency said Thursday. 

  Despite this extra supply, the IEA, which represents major energy consuming countries, increased its 2011 oil price assumption by $9 to $90 a barrel for benchmark crude West Texas Intermediate. The agency said the safety cushion provided by oil stocks in developed economies fell to a two-year low and its oil demand forecast for 2011 increased by 120,000 barrels a day on the back of improved economic prospects in the U.S. and higher Chinese consumption.

  Most of the OPEC oil supply boost of 280,000 barrels a day came from Iraq's Rumaila and Zubair oil fields, where international oil companies have been working to turn around decades of neglect and improve resource recovery, the IEA said in its monthly report.

  Qatar and the United Arab Emirates also produced an additional 200,000 barrels a day of natural gas liquids as new gas projects came onstream, the IEA said.

  Those countries are OPEC members, but neither Iraqi crude nor natural gas liquids are subject to the group's export quotas. OPEC said there is no need to raise its crude oil production ceiling. The group's spare production capacity fell by 0.2 million barrels a day to 4.7 million barrels a day.

  Speaking to Dow Jones Newswires Wednesday, Iran's OPEC governor Muhammad Ali Khatibi said the group is currently supplying more crude oil than the market needs for the first half of the year.

  After clashing last month over the need for additional supply to keep a lid on prices, OPEC and the IEA almost agreed on the required level of the group's production in 2011.

  This near-agreement came as OPEC, in its monthly report also published Tuesday, increased its estimate for how much crude the world will need from the group this year by 400,000 barrels a day to 29.8 million barrels a day. The IEA put that figure at 29.9 million barrels a day.

  Non-OPEC supply was unchanged in January after a series of weather related shutdowns constrained production in several parts of the world, the IEA said.

  Although supply has risen, the IEA maintained that fundamentals were bullish for the oil price. "The physical market has tightened significantly in 2010," it said. "A cushion of stocks and spare capacity does provide some potential to constrain further price increases in 2011. That is just as well, given the potentially damaging short-term economic impacts were prices to continue to rise."

  Patterns of oil consumption reinforced the belief that developed economies are recovering faster than expected. "Despite very cold weather in all three [OECD] areas, demand growth was to a large extent driven by industrial and transportation fuels--in line with an economic recovery somewhat more pronounced than previously thought," the IEA said.

  However, the agency also warned of "persistent frailties in advanced economies and inflationary pressures in emerging countries," that could make demand growth slower than expected.