Overview
The International Energy Agency (IEA) said Friday that global oil demand is on track to fall for the first time since 2020, driven in large part by disruptions to production and exports in the Middle East linked to the war between Israel and Iran. The agency's latest monthly oil market report projects a contraction of 1 million barrels a day in world demand this year compared with last year, marking the first annual decline since the depths of the Covid-19 pandemic.
The IEA described the contraction as "highly skewed in both product and regional terms," attributing part of the shock to the closure of the Strait of Hormuz, which has disrupted exports through the Persian Gulf.
Assumptions and near-term outlook
The agency said a recovery is under way but made clear that its forecast relies on the assumption that a ceasefire will hold and that tanker traffic through the Strait of Hormuz will gradually resume. The report noted heightened uncertainty after recent exchanges of fire between the U.S. and Iran and attacks on shipping. Several ships have come under attack, and traffic through the strait has slowed to a trickle once again.
On the risks to normalization, the IEA warned:
"While the global oil market balance looks set to swing back to surplus towards the end of the year, the forecast hinges on the assumption that tanker flows through the Strait will gradually recover, allowing producers to restart fields and refiners in the Middle East and elsewhere to resume product shipments," the IEA wrote. "Renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement, which is a must for the normalization in oil markets."
Market reaction
Prices were little changed on Friday but were tracking solid weekly gains as market participants balanced the prospect of renewed U.S.-Iran hostilities against expectations that the conflict might remain contained and not severely disrupt Persian Gulf crude supplies. Traders weighed these conflicting forces when assessing near-term supply tightness and the path for oil prices.
Revisions to Russian production outlook
The IEA also trimmed its forecast for Russian oil production, pointing to Ukraine's intensifying drone campaign targeting energy infrastructure. The agency said Kyiv has stepped up strikes on refineries and related facilities to try to choke off funding for Moscow's war effort, and that continued attacks on refineries, storage and transport underpin a weaker production outlook.
Drawing on that assessment, the IEA said it had cut its Russian supply outlook by 85,000 barrels per day for this year and by 150,000 barrels per day for next year, resulting in an average of 8.8 million barrels per day over the forecast period.
"Continued strikes on refineries, storage facilities and transport infrastructure underpin a weaker production outlook and we have accordingly cut our Russian supply outlook for this year and next, by 85,000 barrels per day and 150,000 bpd respectively, to average 8.8 million bpd over the forecast period," the agency said.
The IEA now expects Russia to pump 8.9 million barrels a day this year and 8.8 million barrels a day in 2027, down from 9.2 million barrels a day in 2025.
Implications
The report underscores how geopolitical friction in the Gulf can meaningfully alter short-term demand dynamics and highlight the fragility of export routes. While the IEA projects a swing back to surplus near year-end under its baseline assumptions, it emphasizes that the outlook remains exposed to renewed conflict and continued attacks on energy infrastructure.