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

Global oil demand is projected to fall by 1 million barrels per day this year, marking the first annual decline since the COVID-19 pandemic in 2020, according to a new report from the International Energy Agency (IEA). The agency attributes the sharp reversal primarily to production and export disruptions stemming from the conflict in the Middle East.

Demand Outlook Hinges on Mideast Stability

In its latest monthly oil market report, the IEA stated the forecasted contraction is "highly skewed in both product and regional terms." The primary driver for the downgrade is the disruption of tanker traffic through the Strait of Hormuz, a critical chokepoint for global energy supplies, following the closure of the passage.

The agency's forecast assumes a gradual recovery in tanker flows, which would allow producers to restart fields. However, the IEA cautioned this outlook is fragile, noting that a lasting peace agreement is "a must for the normalization in oil markets."

While the IEA anticipates the global oil market could swing back to a surplus late in the year, it warned that "renewed exchanges of fire in the Gulf this week highlight the risks."

Russian Production Forecast Lowered

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

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As a result, the agency has cut its Russian supply forecast by:

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

Russian production is now expected to average 8.8 million barrels per day over the forecast period, according to the IEA.

Market Context

The report was released as oil prices were headed for weekly gains, with traders weighing the immediate geopolitical supply risks against the potential for weakening global demand. The IEA's conditional forecast highlights significant uncertainty for the market, with the potential for price volatility depending on both the path of the conflict and the actual strength of consumption.