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In 5 years US will lead oil production gains: IEA

The U.S. will lead the world in oil production increases by 2021 in spite of the country taking the taking the "biggest hit for now," the International Energy Agency (IEA) said on Monday.

In its annual medium-term oil market report, the IEA said that while U.S. light, tight oil (LTO) output is "falling steeply for now" amid a low price environment, the market will begin rebalancing in 2017 and, soon after that, the U.S oil industry could see a robust increase in oil production.

Another country set to ramp up production is Iran, whose supply has come back into the market since international sanctions on the country were removed recently.

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By 2021, the IEA said, "the U.S. and Iran are seen leading production gains among non-OPEC and OPEC countries respectively."

The IEA's report pointed to the risk of an oil price spike in the later part of the outlook period (2017 to 2021) "arising from insufficient investment" as many oil producers around the world seek to mitigate low oil prices by cutting costs and closing rigs.

Oil prices plunged from a high of around $114 a barrel in June 2014 and are currently at around $33 for benchmark Brent crude and $30 for U.S. West Texas Intermediate (WTI).

An imbalance in supply and demand, brimming crude stockpiles and record output from OPEC producers – the 12-member group which chose not to cut production in order to maintain market share and pressure rivals – has been blamed for the decline in prices.

Read MoreOPEC expects rivals to pump out less oil in 2016

Non-OPEC producers, such as those in the U.S., have struggled to break even with the lower oil price and have cut costs drastically, lowering U.S. oil output.

Rebalancing coming

Giving oil markets a sign of hope, the IEA believed that a rebalancing of supply and demand was coming.

It forecast that 4.1 million barrels a day (mb/d) would be added to global oil supply between 2015 and 2021, down sharply from the total growth of 11 mb/d in the period 2009-2015. Global oil demand, in the meantime, would grow and reach 101.6 mb/d by 2021.

Despite the contractions within the U.S. oil industry, the IEA forecast that U.S. production would recover to "reach an all-time high" of 14.2 mb/d by the end of 2021, but only after falling in the short term.

"Light, tight oil output declines by 600,000 barrels this year and by a further 200,000 in 2017 before a gradual recovery in oil prices, combined with further improvements in operational efficiencies and cost cutting, allows production to resume its upward climb," the IEA predicted.

The U.S. remains the largest contributor to supply growth during the forecast period (2017 to 2021), accounting for more than two-thirds of the net non-OPEC increase while Middle Eastern producer Iran would lead OPEC oil output gains, the IEA predicted.

Read MoreWhy Iran is a problem for the oil market

Risks as supply growth wanes

Despite the positive outlook for U.S. oil production, the wider drop in supply growth, accompanied by cutbacks in the global industry, could cause some unpredictable moves in oil prices in future, according to the IEA.

"The drop in supply growth comes as upstream investment dries up in response to the current glut that is pressuring prices," the IEA said, noting that global oil exploration and production capital expenditures (capex) were expected to fall 17 percent in 2016, following a 24 percent cut in 2015.

It warned that cuts to investment in the industry posed "supply security risks down the road."

"The report notes that while oil prices should start to rise gradually once the market begins rebalancing, the availability of resources that can be easily and quickly tapped will limit the scope of rallies – at least in the near term. However, the report points to the risk of an oil price spike in the later part of the outlook period arising from insufficient investment."

IEA Executive Director Fatih Birol said the current cuts in investment in the oil industry amid a glut in supply could come back to haunt markets.

"It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant-future."

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