Rami Abdurrahman, director of the war monitoring group, told news agencies on Tuesday that Baghdadi died in Deir az Zor province in eastern Syria.
"Top-tier commanders from ISIL who are present in Deir az Zor province have confirmed the death of Abu Bakr al-Baghdadi, emir of the Islamic State group, to the Observatory," Abdurrahman told the AFP.
"We learned of it today but we do not know when he died or how."
The report could not be independently verified and Baghdadi has been reported dead several times.
There was no official confirmation or denial of the news on ISIL-affiliated websites and social media feeds.
Russia's defence ministry said in June that it might have killed Baghdadi when one of its air strikes hit a gathering of ISIL commanders on the outskirts of the Syrian city of Raqqa, but Washington said it could not corroborate the death and Western and Iraqi officials have been sceptical.
Abdurrahman said Baghdadi "was present in eastern parts of Deir az Zor province" in recent months, but it was unclear if he died in the area or elsewhere.
Deir az Zor remains largely under ISIL control even as the group is losing territory elsewhere in the country and in neighbouring Iraq.
Iraqi and Kurdish officials did not confirm his death.
The US Department of Defence said it had no immediate information to corroborate Baghdadi's death.
The 46-year-old Iraqi-born leader of ISIL has not been seen in public since making his only known public appearance as "caliph" in 2014 at the Grand Mosque of al-Nuri in Mosul.
ISIL destroyed the highly symbolic site before Iraqi forces could reach it as they pushed the group from Mosul, where Iraq's government formally declared victory on Monday.
With a $25m US bounty on his head, Baghdadi has kept a low profile and was rumoured to move regularly throughout ISIL-held territory in the area straddling Iraq and Syria.
His death, if confirmed, would be a new blow to the group which is also battling a US-backed coalition of Kurdish and Arab fighters for control of Raqqa.
Source: News agencies