IEA Projects First Annual Oil Demand Decline Since 2020 on Mideast Conflict

Global oil demand is projected to decline for the first time since the COVID-19 pandemic, driven by production and export disruptions from the conflict between Israel and Iran. The International Energy Agency (IEA) said Friday in its latest monthly oil market report that it expects world demand to fall by 1 million barrels a day in 2026 compared to the previous year.

Mideast Tensions Roil Supply Chains

The IEA attributed the sharp contraction primarily to the recent closure of the Strait of Hormuz, a critical chokepoint for global energy shipments. The disruption has severely hampered exports through the Persian Gulf, creating a downturn that the agency described as "highly skewed in both product and regional terms."

The agency's forecast operates on the assumption that a ceasefire will hold and that tanker traffic through the strait will gradually recover. However, the IEA warned that the outlook remains fragile, stating that renewed fighting "highlight[s] the risks of not reaching a lasting peace agreement, which is a must for the normalization in oil markets."

Russian Production Outlook Lowered

Compounding the supply-side issues, the IEA also downgraded its outlook for Russian oil production. The revision comes as Ukraine intensifies its drone attacks on Russian energy infrastructure, including refineries and storage facilities, in an effort to curb Moscow's funding for its war effort.

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The agency cut its forecast for Russian supply by:

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

As a result, the IEA now expects Russian production to average 8.8 million barrels per day over the forecast period, down from a previous estimate of 9.2 million bpd in 2025.

Market Impact and Outlook

While oil prices were little changed on Friday, they were on track for weekly gains as traders balanced the risks of a wider conflict against expectations that major supply disruptions could be contained. The IEA noted that while the global oil market appears set to return to a surplus by the end of the year, this balance is entirely dependent on the recovery of tanker flows and the restart of production fields in the Middle East.