IEA Warns of Widening Oil Supply Gap as War Hammers Demand

The International Energy Agency reports that the renewed escalation of the Iran conflict is causing a much larger-than-expected decline in global oil inventories this quarter, more than doubling previous estimates, even as high prices continue to batter demand.

In its monthly report, the IEA stated that the oil market is facing a supply deficit of 1.8 million barrels per day, driven by "resurgent conflict and maritime disruptions" that are hindering production recovery. The supply gap for the full year of 2026 could reach its highest level in five years.

Despite high fuel prices, the agency has sharply raised its forecast for the decline in global oil demand this year by nearly 50%, to 1.6 million barrels per day, the largest annual drop since the COVID-19 pandemic in 2020, yet inventories continue to tighten.

A brief US-Iran ceasefire in mid-June had restored Persian Gulf crude oil exports, but shipping routes and regional energy infrastructure are now under renewed attack. This is pushing up prices for fuel staples like gasoline and diesel, which power the global economy, putting pressure on consumers.

However, thanks to various workarounds, the actual drop in production is far less severe than some of the worst-case scenarios seen at the beginning of the war. These include the use of alternative pipelines by Saudi Arabia and the UAE, as well as a network of transshipment tankers operating in the Strait of Hormuz.

US Energy Secretary Chris Wright said on Tuesday that 9 million barrels of crude oil per day had been shipped out over the past week, roughly half of the pre-war level.

The Paris-based IEA said the oil market is expected to swing into a surplus next year, allowing for the replenishment of the global stocks that have been consumed. The report noted that member countries of the agency, such as the US, Japan, and Germany, need to rebuild their emergency petroleum reserves after a record release of strategic stockpiles in March.

"Although the market is expected to shift to a surplus by the end of this year, the risks remain enormous," the agency said. "The available inventory buffer is being consumed rapidly, increasing the urgency to clear the Strait of Hormuz."