The global physical silver market is expected to record a 1,005 mt deficit in 2016, up from a deficit of 793 mt in 2015, Metals Focus said in its most recent global silver survey Thursday.
The increased deficit is forecast to come primarily from a tightening in supply, rather than increased demand, it said.
Total supply is expected to be 1% lower on the year in 2016, at 32,192 mt, due to a 2% fall in mine production, the survey said.
The fall in mine production is significant, according to Metals Focus, as it comes after 10 years of production growth.
While total demand is expected to remain flat on the year, at 33,209 mt, as falling investment demand is balanced by extra demand from the industrial sector.
However, a second year of market deficit is not expected to necessarily result in higher silver prices, the survey said, largely due to high silver bullion stocks.
"While the overall physical market is in a small deficit, if we exclude retail investment in bars and coins, supply continues to far exceed fabrication demand," MF said. "This will mean silver's destiny over the rest of the year will remain tied to investment, in particular professional, activity."
"This remains largely speculative and correlated to the direction and level of the gold price, and thus by implication to broader market sentiment regarding the outlook for US monetary policy and the dollar," according to MF.
Gold has retreated 7%, silver 11%, since their highs at the beginning of May, largely due to increased interest rate expectations from the US.
The most recent data from US commodity exchange COMEX showed net long silver positions declined 15% on the week to May 24 to 57,995 contracts, down for the second consecutive week from record highs at the beginning of the month.
Net long gold positions declined by 26% on the week, meanwhile, in the steepest decline for six months, according to COMEX data.
The London Bullion Market Association Silver Price settled at $15.95/oz Wednesday, down 11 cents/oz on the previous day.
The LBMA Gold Price settled at $1,216.25/oz Wednesday morning, up $5.75/oz on the previous day.
