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

Global oil demand is on track to fall for the first time since the COVID-19 pandemic, declining by 1 million barrels per day this year, according to a new report from the International Energy Agency (IEA). The agency attributed the significant downgrade to production and export disruptions caused by the escalating conflict between Israel and Iran.

Middle East Tensions Drive Downgrade

In its latest monthly oil market report, the IEA detailed that the contraction is heavily concentrated in specific products and regions, driven by the closure of the Strait of Hormuz. This critical waterway in the Persian Gulf has seen tanker traffic slow dramatically, disrupting crude and refined product shipments from the region.

The IEA's forecast is contingent on a fragile outlook. The agency warned its projections assume a ceasefire holds and that tanker flows through the strait gradually resume. "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," the IEA stated.

Russian Production Outlook Also Cut

The report also revised down its forecast for Russian oil production, citing Ukraine's sustained drone campaign against the country's energy infrastructure. The IEA noted that continued strikes on refineries, storage facilities, and transport networks underpin a weaker supply outlook.

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As a result, the agency has cut its Russian supply forecast for this year by 85,000 barrels per day and for next year by 150,000 bpd. The IEA now expects Russia, the world's third-largest producer, to pump 8.9 million barrels per day this year and 8.8 million in 2027.

Market Implications

Oil prices were poised for weekly gains despite the bearish demand forecast, as traders weigh the immediate risk of a wider supply disruption in the Persian Gulf. The market remains sensitive to geopolitical developments that could further impact crude flows.

The IEA suggested that the global oil market balance could swing back into a surplus toward the end of the year. However, it stressed that this outcome depends entirely on the recovery of tanker traffic in the Middle East, underscoring the uncertainty facing energy markets.