The International Energy Agency says demand for oil has rebounded to the highest levels in five years, as consumers respond to lower prices and the global economy strengthens.

However, the bad news for the big oil producers like OPEC, is that global supply remains strong and the lower prices are unlikely to significantly dent production until next year.

The IEA's August Oil Market Report found, "the supply overhang - the difference between global supply and demand - has persisted and reached a staggering 3 million barrels per day in the second half of 2105, the widest gap in 17 years, as ever-higher flows of oil hit world markets."

However, the IEA revised up its growth forecast for oil demand by 14 per cent - or 200,000 barrels a day - to 1.6 million barrels a day this year.

Oil supply fell by 600,000 barrels a day in July, mainly due to production declines in non-OPEC nations.

OPEC production remained steady at three-year highs.

The IEA report argued, as lower prices and spending cuts take a toll, non-OPEC supply growth is expected to slow sharply from a 2014 record of 2.4 million barrels a day to 1.1 million barrels a day this year.

"Our latest forecast shows stronger-than-anticipated demand and non-OPEC supply growth swinging into contraction next year," the IEA said.

"On the other side of the equation, global supply continues to grow at a breakneck pace - currently running 2.7 million barrels a day above a year earlier - despite a collapse in oil prices.

"While a rebalancing has clearly begun, the process is likely to be prolonged as a supply overhang is expected to persist through 2016 - suggesting global inventories will pile up further."

However, the IEA outlook does not include potentially higher Iranian output in the case of sanctions being lifted.

The independent energy and resources newsletter Platts reported that OPEC production jumped by 120,000 barrels a day last month to 31.4 million barrels a day.

OPEC's dominant player Saudi Arabia accounted for more than 80 per cent of the increase.

Sanction-free Iran set to add 1 million barrels a day

"OPEC is now pumping at its highest level in three years, and that's before Iran comes back at full throttle," said Platts' analyst Margaret McQuaile.

"At some point, something will have to give, but that time may be some way off.

"Despite oil prices having slipped below $US50 per barrel, and with the prospect of additional crude flows from Iran in a few months' time, there is no sign that OPEC's Saudi-driven market share policy is about to change in the short term."

Before sanctions were imposed, Iran was the OPEC cartel's second biggest producer.

However, last month's breakthrough nuclear safeguards deal between Iran, the US and five other world powers paves the way for Iran to start boosting production from December.

Iran has said it can supply an additional million barrels a day within six months of the removal of sanctions.