Iran war upends IEA's oil market outlook as global supply and demand to contract in 2026

The Iran war will force both global oil supply and demand to fall from last year, the International Energy Agency said in its monthly oil market report on Tuesday, as the world economy contends with the largest supply disruption in history.

The Iran war has "thoroughly upended the global outlook for oil consumption", the agency ‌said, as it ⁠now predicts ⁠an 80,000 bpd drop in demand growth this year, from a 640,000 bpd rise in its March report. In its March report, the IEA characterised the war in the Middle East as the largest-ever oil supply disruption, but had still expected year-on-year growth in both supply and demand.

DEMAND WEAKNESS EXPECTED TO DEEPEN

"Demand destruction will spread as scarcity and higher prices persist," the IEA said, adding that the deepest cuts in oil consumption have come from the Middle East and Asia-Pacific so far, for naphtha, LPG and jet fuel in particular.

The agency said a projected 1.5 million bpd drop in demand in the second quarter of 2026 would mark the deepest contraction since ⁠the COVID-19 pandemic. Oil ‌producer group OPEC on Monday lowered its own prediction for world oil demand in the second quarter, but kept its full-year outlook unchanged.

On the supply side, the IEA said global output is expected to fall by 1.5 ⁠million bpd on average this year from last year, as strikes on Middle East energy infrastructure and Iran's effective closure of the Strait of Hormuz hit production and exports, an approximate 2.6 million bpd swing from its March forecast of a 1.1 million bpd rise.

Attacks on regional energy infrastructure and the effective closure of the Strait of Hormuz led to a loss of 10.1 million bpd of supply in March, the agency said, calling it the largest oil supply disruption in history.

Overall, the IEA forecasts imply that supply will be higher than demand by just 410,000 bpd in 2026, a reduction from a 2.46 million bpd surplus in last month's report.

Oil prices were little changed on Tuesday. Brent ‌futures were trading at $98.60 per barrel at 0847 GMT, little changed from $98.58 at 0759 GMT just before the report release.

HORMUZ REOPENING KEY TO EASING STRAINS

The flow of crude oil, refined fuels and natural gas liquids was just 3.8 million bpd in early April, down from more ⁠than 20 million bpd in February before the U.S. and Israel launched their initial strikes on Iran.

"Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy," the IEA said.

The IEA's base case forecast is for regular deliveries of oil and gas from the Middle East to international markets to resume by mid-year, although below pre-conflict levels. However, the agency also presented a more severe scenario with longer-term supply disruptions, which could draw almost 2 billion barrels of oil from stocks and force demand to fall 5 million bpd year-on-year on average from the second quarter to the fourth quarter.

"With the geopolitical situation still in flux and the prospects for a lasting negotiated settlement to the conflict still unclear, our two cases span the range of probable outcomes."