Aug. 10, 2018 4:00 a.m. ET

LONDON—The world’s oil supply expanded in July on the back of surging Russian crude production, the International Energy Agency said Friday, in a concrete sign of the unraveling of a nearly two-year-old OPEC-led agreement to curb output.

In its closely watched monthly oil market report, the IEA said Russian crude and condensate production climbed by 150,000 barrels a day last month, to 11.21 million barrels a day. That “significantly sharper acceleration than expected” put output 265,000 barrels a day higher year-on-year and just 14,000 barrels a day lower than Russia’s October 2016 record high, the agency said.

Total global oil supply rose by 300,000 barrels a day in July, to reach 99.4 million barrels a day, boosted by Russian production, as well as higher output in Kuwait and the United Arab Emirates—two key members of the Organization of the Petroleum Exporting Countries.

OPEC—de-facto led by Saudi Arabia, the world’s largest crude exporter—and 10 producers outside the cartel, including Russia, agreed in late 2016 to hold their output back by around 1.8 million barrels a day, or 2% of global supply. The coordinated effort, designed to rein in a supply glut that had weighed on prices since 2014, helped boost crude prices by more than 50%.

Brent crude—the global oil benchmark—temporarily breached the $80 a barrel threshold this past spring for the first time in more than 3 ½ years, before falling in recent weeks amid rising global output. Brent on Wednesday closed down 0.3%, to $72.07 a barrel.

As a result of deeper cuts from countries like Saudi Arabia and production outages in other OPEC members like Venezuela and Libya, compliance with the deal by OPEC and non-OPEC participants exceeded the planned quotas, rising to around 150%. That development, combined with concerns the higher price environment could dent demand and the global economic growth, prompted the Saudis and Russians to push to relax production curbs.

OPEC and Russia agreed in late June to begin ramping up output in July, with the goal of bringing compliance with the deal down to 100%—an increase of up to around one million barrels a day.

Overall compliance with the agreement dropped to around 97% in July, the IEA said Friday.

However, the agency said that July output just within the OPEC oil-cartel was steady, at 32.18 million barrels a day, as a result of an unexpected drop in Saudi production. Despite expectations, Saudi production would rise by a self-described “measurable” increase of several hundred thousand barrels a day last month, production fell by 110,000 barrels a day, to 10.35 million barrels a day, as exports declined, according to the IEA.

Despite a “recent cooling down of the market,” the IEA cautioned, “with short-term supply tensions easing, currently lower prices and lower demand growth might not last.”

The agency warned that the full reimposition of U.S. economic sanctions on Iran by November—a result of President Donald Trump’s withdrawal from the 2015 Iran nuclear agreement in May—would continue to squeeze the OPEC member’s crude exports, further tightening global supply and potentially spiking prices.

The IEA maintained its global oil demand outlook for 2018, reiterating demand growth of 1.4 million barrels a day, and projecting growth next year of around 1.5 million barrels a day. But “there are risks to the forecast if from escalating trade disputes and rising prices if supply is constrained,” the agency noted.

Write to Christopher Alessi at email@example.com The IEA cautioned that “with short-term supply tensions easing, currently lower prices and lower demand growth might not last”

IEA said Russian crude and condensate production climbed to 11.21 million barrels a day
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