Key Takeaways:
Global oil demand is projected to fall by 1 million barrels a day this year — the first annual decline since 2020 — but the pace of the drop is easing as supply disruptions from the Strait of Hormuz begin to unwind, the International Energy Agency said Friday.
"The pace of decline is moderating as supply from the Middle East gradually recovers, but renewed hostilities this week underscore how fragile the outlook remains," said Toril Bosoni, head of the IEA's oil market division. "A lasting ceasefire is a prerequisite for normalization."
The IEA's July report estimates world oil demand will contract by roughly 1 million b/d year-on-year in 2026, a decline "highly skewed" toward the Persian Gulf region after the closure of the Strait of Hormuz — through which about 20% of global liquefied natural gas and a significant share of crude flows — disrupted exports from March through June. Brent crude surged above $126 a barrel in late April and U.S. crude approached $120 in early March following the initial U.S.-Israeli strikes on Iran on Feb. 28. Prices have since retreated to around $78 a barrel, though renewed exchanges of fire in the Gulf this week slowed tanker traffic to a trickle once again.
The IEA's baseline forecast assumes a ceasefire holds and Hormuz gradually reopens, allowing producers to restart fields and refiners to resume product shipments. But the agency warned that "renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement." The demand recovery, while underway, remains conditional on geopolitical stability — a condition that has proven elusive.
The SPR Wild Card
Governments are set to buy millions of barrels of oil through 2028 to rebuild emergency reserves depleted by the crisis, creating a new source of demand that could absorb some of the expected supply surplus. The IEA coordinated a record 400-million-barrel release after the Hormuz disruption drove prices sharply higher.
Replenishing those reserves could add as much as 664,000 barrels per day of crude demand by the third quarter of 2027, according to commodities analytics firm Kpler, helping to offset some of the excess supply expected as OPEC+ continues to unwind production cuts. U.S. strategic reserves fell to 319.5 million barrels in the week to July 3, the lowest since April 1983, Department of Energy data showed.
The United States is expected to begin receiving oil back later this year under exchange agreements that require companies to return borrowed barrels plus a premium. U.S. Energy Secretary Chris Wright told Reuters the government expects to receive an average of 1.28 barrels for every barrel released, which would help lift inventories above 400 million barrels. Washington is exploring ways to raise stocks beyond 500 million barrels, Wright said.
Other IEA members are moving more cautiously. Analysts expect Japan and South Korea to rebuild reserves more gradually, with replenishment efforts likely to depend on oil prices and government spending decisions. China, meanwhile, is building 11 new strategic oil storage sites, while India plans to more than double its strategic petroleum reserve capacity through expansion projects at Padur and Chandikhol.
What's at Stake
The dual forces of demand recovery and SPR restocking are creating a floor under crude prices even as OPEC+ adds supply. Energy Aspects estimates that SPR replenishment alone will "lead to a higher price floor in 2027." But the outlook hinges entirely on the trajectory of the U.S.-Iran conflict. If a ceasefire holds and Hormuz flows normalize, the IEA sees the market swinging back to surplus by year-end. If hostilities escalate further, the supply shock could deepen, pushing prices higher and delaying the demand recovery the agency is now beginning to document.
This article is for informational purposes only and does not constitute investment advice.
