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

Global oil demand is projected to fall for the first time since 2020, contracting by 1 million barrels per day (bpd) this year, according to a new report from the International Energy Agency (IEA). The agency attributed the expected decline, the first since the COVID-19 pandemic, to production and export disruptions stemming from the conflict between Israel and Iran.

Mideast Tensions Disrupt Key Waterway

The IEA's monthly oil market report, published Friday, highlights the closure of the Strait of Hormuz as a primary driver of the downturn. The disruption to tanker traffic through the critical Persian Gulf chokepoint has significantly impacted exports.

The energy watchdog described the contraction as "highly skewed in both product and regional terms." The forecast operates on the crucial assumption that a ceasefire will hold and that tanker flows through the Strait will gradually recover. The IEA warned that this outlook is fragile, stating, "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."

Russian Production Outlook Trimmed

Separately, the IEA also lowered its forecast for Russian oil production, citing the impact of Ukraine's sustained drone attacks on the country's energy infrastructure. The strikes on refineries, storage, and transport facilities have weakened Russia's supply capacity.

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The agency has revised its Russian supply outlook downward for this year and next:

• 2026 cut: by 85,000 barrels per day
• 2027 cut: by 150,000 barrels per day

This brings the IEA's new forecast for Russian output to an average of 8.8 million bpd over the period, a notable reduction from previous estimates.

Market Impact

Oil prices showed little movement Friday but were on track for weekly gains as traders assessed the complex geopolitical landscape. The market is currently balancing the immediate risks of renewed hostilities in the Persian Gulf against the IEA's projection that the global oil balance could shift back to a surplus by the end of the year, provided the conflict de-escalates and shipping routes reopen.