IEA Forecasts First Annual Oil Demand Drop Since 2020 Amid Mideast Conflict

Global oil demand is projected to fall for the first time since the COVID-19 pandemic, driven by production and export disruptions from the conflict in the Middle East, the International Energy Agency (IEA) said in its latest monthly report. The agency forecasts a year-over-year decline of 1 million barrels per day in 2026.

Mideast Conflict Hits Demand

The IEA's downward revision is primarily attributed to the war between Israel and Iran, which has severely impacted shipping through the Strait of Hormuz. The agency described the contraction as "highly skewed in both product and regional terms," reflecting the concentrated impact of disruptions in the Persian Gulf.

The forecast hinges on a fragile outlook. The IEA's projection assumes a ceasefire holds and that tanker traffic through the critical waterway gradually resumes. However, the agency warned that renewed fighting could further cloud the forecast, stating that a "lasting peace agreement... is a must for the normalization in oil markets."

Russian Supply Outlook Lowered

In addition to demand-side shocks, the IEA also downgraded its forecast for Russian oil production, citing Ukraine's sustained drone attacks on the country's energy infrastructure. The strikes on refineries and storage facilities have weakened Russia's output capabilities.

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The agency cut its outlook for Russian supply by:

• 85,000 barrels per day for the current year.
• 150,000 barrels per day for next year.

This revision brings the IEA's forecast for Russian output to an average of 8.8 million bpd over the forecast period.

Market Implications

For investors, the report highlights significant uncertainty. While a drop in demand is typically bearish for prices, the geopolitical risks are providing support. Oil prices were headed for weekly gains as traders weighed the potential for a wider conflict against the IEA's projection that the market could "swing back to surplus towards the end of the year" if tensions de-escalate and shipping routes reopen.