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LONDON: Saudi Arabia and the United Arab Emirates (UAE) could help to calm oil markets if they pumped more crude, the International Energy Agency (IEA) said on Friday, but prices rose after the watchdog highlighted deepening risks of volatility.

Brent crude oil futures bounced back to near seven-year highs and hit a session peak of $92.75 a barrel after the Paris-based agency reported tight global supply and spare production capacity.

"These risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out," the Paris-based agency said in its monthly oil report.

The UAE and Saudi Arabia are the two oil producers with the most spare production capacity.

"Oil prices are rallying once more as the IEA raised forecasts for demand this year and confirmed that OPEC+ missed its output targets again in January and by an even wider margin," said Craig Erlam, senior market analyst at OANDA.

OPEC sees upside to 2022 oil demand forecast on strong pandemic recovery

The IEA said if OPEC+ - the Organization of the Petroleum Exporting Countries members and allies like Russia - unwind their current output cuts completely, they could add 4.3 million barrels per day (bpd) back into the market.

However, the IEA said that would slash effective spare capacity to 2.5 million bpd by the end of the year, held up almost entirely by Saudi Arabia and, to a lesser extent, the UAE.

For now, while OPEC+ is raising output each month, it is not hitting its monthly target of 400,000 extra barrels per day. The IEA said in January the gap between output and the target widened to 900,000 bpd.

"The bloc's prolonged underperformance has effectively taken 300 million barrels, or 800,000 bpd, off the market since the start of 2021," the IEA said.

A successful outcome to international talks with Iran could lift US sanctions on the country's exports and relieve supply tightness, the IEA added, gradually bringing 1.3 million bpd of Iranian oil back into the market.

Supply and demand look set to be balanced in the first quarter but are expected to flip into a surplus in the second quarter or second half of the year, the IEA added.

The need to refill depleted oil stocks, which in OECD countries fell by 60 million barrels in December down to seven-year lows, means immediate oversupply is unlikely.

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