While the current focus is on declining oil prices – which hit four-year lows yesterday – the longer-term oil market picture could feature downward supply pressure and a demand surge that forces prices right back up, according to IEA’s flagship World Energy Outlook 2014. The agency cautions against allowing current supply/demand fundamentals to breed complacency.

“A well-supplied oil market in the short-term should not disguise the challenges that lie ahead, as the world is set to rely more heavily on a relatively small number of producing countries,” said IEA Chief Economist Fatih Birol. “The apparent breathing space provided by rising output in the Americas over the next decade provides little reassurance, given the long lead times of new upstream projects.” – IEA

IEA’s analysis sees non-Opec oil output slowing in the 2020s and Middle Eastern producers again becoming the world’s oil supply workhorses. In that scenario, Middle Eastern and North African political turmoil and security threats present “major” oil market risk.

A classic boom and bust cycle could be emerging where lower oil prices stifle upstream investment and spur demand, which over the long term erodes any global oil supply cushion and returns the market to an edgy state of tightness. By 2040, global oil supply and demand meet at about 104 million barrels per day, according to the report.