New Delhi: The world’s oil market has moved from fears of a catastrophic supply shock to concerns of a demand collapse within weeks. The International Energy Agency (IEA) now expects global oil demand to shrink by 1.1 million barrels per day (mb/d) in 2026, the first annual decline in years, even as a “possible” US-Iran peace agreement eases concerns over supply disruptions in the Gulf.
The sharp reversal underlines a more uncomfortable reality: while the reopening of the Strait of Hormuz may prevent a prolonged energy crisis, the global oil market remains scarred by months of war-driven disruptions, record inventory drawdowns and weaker consumption across major economies.
Demand Shock Deepens
The biggest concern for the oil market is no longer a shortage of crude but the speed at which consumption has weakened. According to the IEA, global oil deliveries plunged by 5 mb/d year-on-year in the second quarter of 2026 as high fuel prices, disrupted product availability and weaker economic activity curtailed demand.
“We now expect deliveries to decline by 5 mb/d year-on-year in 2Q26 and by 1.1 mb/d for 2026 as a whole. This is a downgrade of 700 kb/d compared with last month’s (May) report, as the impacts of nearly four months of disruptions spread across products and regions,” the IEA said.
The agency’s latest forecast suggests the demand destruction caused by the Gulf conflict may have been deeper than initially estimated. China and Japan have witnessed sharp declines in crude imports, while reduced refinery activity across China, the Middle East, Eurasia and other Asian markets has amplified the slowdown.
Yet the weakness appears temporary. The IEA expects global oil demand to recover by 2 mb/d in 2027, supported by lower oil prices, a normalisation of trade flows and an improvement in the broader economic environment.
Supply Risks Persist
The US-Iran interim agreement has dramatically altered market sentiment. Brent crude prices have fallen more than $40 a barrel from their April peaks as investors bet that Iranian exports will gradually return and shipping through the Strait of Hormuz will normalise.
“The biggest breakthrough in negotiations since the start of the conflict sent oil prices tumbling to their lowest levels since early March. While details of the deal have yet to be clarified and several issues remain outstanding, it is an encouraging step forward,” the IEA said.
However, a full recovery in Gulf oil supplies will be neither swift nor guaranteed. Shipping lanes still require demining, logistical networks need rebuilding and political arrangements governing transit remain unresolved.
The IEA estimates global oil supply will fall by 3.9 mb/d to 102.4 mb/d in 2026 despite the expected return of Iranian exports. Production is projected to rebound sharply by around 8 mb/d in 2027 to 110.3 mb/d, largely driven by recovering Gulf supplies and continued output growth from non-OPEC+ producers.
Inventory Warning Signals
The most alarming development is happening beneath the surface: the rapid depletion of global oil inventories. Despite weaker demand and lower refinery runs, the world’s emergency buffers are disappearing at a pace not seen in decades.
“Global observed oil stocks have declined by 3.8 mb/d on average since the start of the war, with a sizeable draw of 143 million barrels in May. Further declines in the coming months could still take global oil stocks to historic lows before the market balance shifts to surplus towards the end of the year,” the IEA warned.
OECD government reserves have fallen to their lowest levels since December 1990 as emergency releases accelerated to offset supply disruptions. Refinery crude processing is also expected to contract by 2 mb/d to 82 mb/d in 2026, reflecting a sharp reduction in demand across Asia and other affected regions.
Ironically, the same market that spent months worrying about a supply crunch could soon confront the opposite challenge. The IEA’s first assessment for 2027 points to a sizeable surplus, with global supply expected to reach 110.3 mb/d against demand of 105.3 mb/d.
“Our first look at 2027 balances shows a significant overhang emerging next year. This may provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in response to the crisis,” the IEA said.
For consumers, particularly energy-importing nations such as India, lower crude prices may offer relief. For producers, however, the coming challenge may not be securing supply routes but navigating a world where demand has weakened and excess oil once again threatens to drag prices lower.
(Cover photo by Erik Mclean on Unsplash)