MW The International Energy Agency is really worried about the global oil market
By Myra P. Saefong
IEA says the Iran war has 'thoroughly upended' the global outlook for oil demand
Tight oil supplies and high prices are likely to lead to a drop in global crude demand this year, according to the IEA.
Since the start of the Iran conflict, investors around the world have been worried that tight global oil supplies and high prices could eventually lead to a drop in demand. According to the International Energy Agency, these risks are finally starting to materialize.
In its latest monthly report on Tuesday, the IEA forecast a 2026 decline in world oil consumption and said that demand destruction will likely pick up as supplies continue to tighten and higher crude prices persist, with flows through the Strait of Hormuz severely restricted amid the ongoing U.S.-Israel war with Iran.
Demand destruction is among the many deleterious consequences of oil near $100 a barrel, said Pavel Molchanov, investment strategy analyst at Raymond James.
In developed economies, this mainly manifests as canceled travel plans, he said in emailed commentary. But in some of Asia's emerging markets, the effects may be far more severe, potentially including fuel rationing.
'The longer oil prices stay high, the more demand destruction will mount.'Pavel Molchanov, Raymond James
"The longer oil prices stay high, the more demand destruction will mount," Molchanov said.
Among the impacts already seen: The Philippines declared a national energy emergency in late March, jet-fuel shortages have led airlines to warn of airfare hikes, and Laos has cut school attendance to three days a week from five to save on fuel.
Demand destruction is going to be "real and significant," especially for emerging-market economies that can't afford higher energy prices, said Edward Meir, an analyst at Marex.
Read: Here's how much worse the global oil supply could get due to the U.S. blockade in Iran
Unlike previous spikes in oil prices, however, this one "may not be short-lived," he said. In most cases, once hostilities or conflict ended, prices retracted. But in this case, there could be a "prolonged squeeze of supply coming out of the Persian Gulf," and prices may need to stay up for much longer to bring about the demand destruction that could offset reduced supply and lead to lower prices, Meir said.
2026 demand decline
Global oil demand is now expected to move into contraction instead of growth this year, the IEA said in its report, noting that the Iran war has "thoroughly upended" the global outlook for oil consumption.
Demand is forecast to decline by an average of 80,000 barrels per day year over year in 2026, the IEA said. In its previous monthly report, the IEA had forecast demand growth of 640,000 barrels per day for this year. Demand is forecast to fall by 1.5 million barrels a day in the second quarter, the sharpest decline since the COVID-19 pandemic.
The Organization of the Petroleum Exporting Countries trimmed its second-quarter demand forecast by 500,000 barrels per day in a report released Monday.
Although global oil demand should resume growing in 2027, the "pace of growth is set be slower than it would have been in the absence of the Iran conflict," said Molchanov at Raymond James.
"Some amount of demand destruction may be permanent," he said. Some consumers may respond to high fuel prices by shifting to more fuel-efficient vehicles, with the "consequences for oil demand" lasting as long as those vehicles remain on the road, which may be a decade or more.
The new demand forecasts also mean that the global balance between supply and demand is a lot more precarious.
The IEA sees 2026 oil supply at 104.7 million barrels per day and demand at 104.3 million barrels per day. That's a small surplus of 400,000 barrels per day. In December, it had forecast a surplus of 3.8 million barrels per day for 2026.
The IEA is flagging the sharpest drop in demand since the pandemic, Stephen Innes, managing partner at SPI Asset Management, told MarketWatch. This time, however, the "shift is macro-driven rather than caused by lockdowns, which suggests a more persistent drag and genuine demand destruction."
The IEA's warning comes a day after the first meeting of the that agency, the International Monetary Fund and the World Bank Group, which have joined forces to monitor developments and coordinate responses to what they referred to as "one of the largest supply shortages in global energy history."
Supply-side uncertainty
It remains unclear whether the U.S.-Iran cease-fire will usher in a lasting peace and a return to regular shipping flows through the Strait of Hormuz, the IEA said in its report. A U.S. military blockade of Iranian ports took effect on Monday.
With oil-importing nations scrambling to source replacement barrels from an "increasingly shrinking pool of supply," physical crude-oil prices on the spot market surged to record levels near $150 a barrel, which is far above the prices in futures markets, it said.
On the futures market, global benchmark Brent crude for June delivery (BRNM26) fell Tuesday by 4.6% to settle at $94.79 a barrel, but that's after posting a 4.4% gain on Monday. The May contract for U.S. benchmark West Texas Intermediate crude (CLK26) dropped 7.9% to $91.28.
Read: As the Iran conflict squeezes global energy supplies, U.S. oil is gaining an unusual edge
There is a clear "mission accomplished" tone being priced into markets, as the cease-fire appears to be holding and talks are reportedly set to move forward, said Jake Behan, Direxion's head of capital markets. For now, "risk appetites are leaning cleanly into a de-escalation narrative."
But the "supply-side uncertainty remains the reality, and that alone can price a premium into the market," Behan told MarketWatch.
Global oil supply dropped by 10.1 million barrels per day to 97 million barrels per day in March, according to the International Energy Agency. It expects supplies to fall by a further 2.9 million barrels per day to 94.2 million barrels per day in April before starting to recover mid-year.
In March, global oil supply plummeted by 10.1 million barrels per day to 97 million barrels per day, according to the IEA. Continued attacks on energy infrastructure in the Middle East and ongoing restrictions on tanker movements through the strait have led to the "largest disruption in history," it said.
The full implications of sidelined oil barrels that haven't made their way through the Strait of Hormuz are "yet to be known or realized, and how quickly those flows normalize remains a critical consideration," Behan said.
"This leaves crude acutely sensitive to any gyrations in the geopolitical narrative, which traders know come fast and furious," he said.
-Myra P. Saefong
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April 14, 2026 16:35 ET (20:35 GMT)
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