The International Energy Agency (IEA) has stated that global oil demand is showing signs of recovery following months of Middle East tensions. However, a renewed escalation in hostilities between the US and Iran is casting significant uncertainty over the market's outlook, just as it prepares for a potential new wave of supply next year.
The agency forecasts that global oil consumption will decline by 1 million barrels per day this year, but the rate of decline has narrowed substantially. The daily demand drop was 4.8 million barrels in the second quarter and is expected to narrow to 1.7 million barrels in the third quarter. By the fourth quarter, demand is projected to return to growth, with daily consumption increasing by 1.2 million barrels compared to the previous quarter.
For much of this year, the market has feared the conflict could slash global oil supply by millions of barrels per day. This demand rebound could mark a turning point. However, the IEA cautions that the latest round of escalating US-Iran conflict could completely upend market expectations for an oil supply surplus next year.
The Paris-based energy watchdog, composed of Western nations and their allies, currently projects global oil demand to increase by 1.9 million barrels per day by 2027, while global supply is expected to grow significantly by approximately 7.5 million barrels per day.
Key Factors Influencing Supply and Demand
In a major monthly report released on Friday, the agency stated: "This supply and demand forecast is based on a premise — the gradual resumption of tanker traffic through the Strait of Hormuz, the restart of production at oil fields in the Middle East and other regions, and the resumption of refined product shipments from refineries."
This week saw multiple rounds of reciprocal strikes between the US and Iran, marking the most intense conflict since the 60-day ceasefire agreement reached in mid-June. President Trump declared the ceasefire agreement invalid and revoked the license allowing Iran to sell oil on the open market.
The IEA noted that shipping traffic through the Strait of Hormuz, a vital chokepoint for about one-fifth of global oil and gas transportation, has once again nearly ground to a halt.
Market Reaction and Current Challenges
Oil prices surged sharply on Friday before retreating, with traders largely adopting a wait-and-see stance. During European morning trading, Brent crude was around $75 per barrel, while West Texas Intermediate (WTI) was slightly above $71 per barrel.
At the end of June, oil shipments through the Strait of Hormuz saw a significant rebound, recovering to over 70% of pre-conflict levels. However, tanker operators continue to face heightened security, insurance, and operational risks. Sea mines have not been fully cleared from the shipping lanes, and negotiations on a long-term control mechanism for the Strait have stalled.
The IEA stated: "A significant volume of Gulf crude oil remains floating at sea awaiting buyers; the pace of supply recovery depends on the progress of regional refinery restarts, whether tanker shipping can consistently obtain security guarantees, and whether Chinese purchasing demand recovers, particularly for Iranian crude."
Supply Recovery and Inventory Trends
As tanker shipping resumed, global oil supply increased by 4.1 million barrels per day in June, reaching 98.8 million barrels per day. However, global total production remains 9.4 million barrels below pre-conflict levels, indicating substantial room for supply recovery.
The IEA forecasts that global oil supply will decrease by 3.7 million barrels per day this year, with a rebound not expected until 2027. The Organization of the Petroleum Exporting Countries and its allies (OPEC+) plan to increase production by 5.3 million barrels per day next year, while non-OPEC+ oil producers are expected to add 2.2 million barrels per day to their output.
Meanwhile, global oil inventories in June ended a four-month consecutive decline, recording an increase for the first time: a substantial rise in floating storage at sea completely offset the continued drawdown in onshore stocks. Data shows that floating storage increased by 117 million barrels following the resumption of shipping, while onshore inventories decreased by approximately 96 million barrels, including a draw of 44 million barrels from the strategic reserves of OECD governments.
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