IEA Monthly Report: Iran War Severely Hits Energy Consumption, Annual Oil Demand Forecast Receives Biggest Downgrade in Six Years

The International Energy Agency (IEA) has sharply lowered its global oil demand forecast, stating that the impact of the Iran war on consumption far exceeds previous estimates and warning that the global oil market may once again face oversupply next year.

In its latest monthly report, the IEA expects global oil demand in 2026 to decrease by 1.1 million barrels per day year-on-year, a drop of about 1%, marking the largest annual decline since the pandemic in 2020. By comparison, the agency had previously only forecast a reduction of 420,000 barrels per day. The IEA attributes this sharp downward revision to oil price surges and disruptions in fuel supply chains caused by the war, both of which have suppressed global energy consumption.

However, weak demand has not alleviated supply tightness. The IEA pointed out that the war has caused global crude oil inventories to decline at a record pace, and after consecutive releases of strategic reserves by governments, official inventories have dropped to the lowest levels since 1990. In the coming months, if supply recovery lags expectations, global inventories may fall further towards historic lows.

But from a longer-term perspective, the IEA believes the current tight situation will eventually ease. As Middle Eastern supply gradually recovers and production outside OPEC+ increases, the global oil market is expected to shift back to oversupply in 2027. The agency forecasts that global oil demand will increase by about 2 million barrels per day next year, with supply growth far outpacing demand, enough to re-establish market surplus.

Demand Downgraded Again, Disruption Scale at Historic High

The IEA has sharply raised its prediction for the decline in global oil demand this year from 420,000 barrels per day to 1.1 million barrels per day, more than doubling the revision.

The agency believes that the high oil price environment brought by the war has begun to visibly erode end-user consumption capability, while fuel supply disruptions have further dragged down transport and industrial activity, resulting in simultaneous slowing of demand and economic growth.

Nevertheless, the decrease in demand is still far from offsetting the shock suffered by the supply side. According to the IEA's estimates, the loss of supply due to this conflict exceeds one billion barrels, making it one of the largest supply crises in modern oil market history. To deal with the huge shortfall, countries can only respond by releasing inventories, increasing other regions' exports, and actively cutting consumption, with Asia's demand adjustment being the most notable.

Ceasefire Agreement Approaching, but Supply Recovery Needs Time

With the US and Iran expediting ceasefire negotiations, expectations for the resumption of Middle Eastern supply are rising in the market.

The IEA stated that shipments in the Strait of Hormuz have significantly recovered since early June, and Gulf oil-producing nations are accelerating their export pace. Once a ceasefire is officially reached, regional crude and refined oil transportation volumes are expected to further increase.

However, the agency emphasized that supply recovery will not happen overnight. The Strait of Hormuz and surrounding waterways still face demining operations, and some ports and logistics systems require time to resume normal operations. The IEA expects that even if a ceasefire agreement is successfully signed, it will still take several months or longer for Iranian crude exports to return to pre-war levels. Transit arrangements, transport safety, and regional political factors remain uncertain and may slow the return of Middle Eastern supply to the market.

Inventories Fall to Lowest Point in Over Thirty Years, Restocking Window May Open in 2027

Against the backdrop of declining demand, global inventories continue to drop rapidly, with the current supply-demand mismatch far exceeding expectations.

The IEA pointed out that after continuous releases from national strategic petroleum reserves in recent months, official inventories have fallen to their lowest levels since 1990. In the coming months, if supply recovers slower than inventory consumption, global oil inventories may fall to historical lows by the end of the year.

The IEA expects the market will shift back to oversupply in 2027, which could mark a crucial restocking window for the global energy system. The agency stated that preliminary supply-demand balance calculations show that a significant supply surplus will emerge then. This will not only help replenish the previously consumed commercial and strategic oil reserves, but also provide an opportunity for nations to reassess their energy security strategies and reserve policies.

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