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

Global oil demand is on track to decline for the first time since 2020, driven by major production and export disruptions stemming from conflict in the Middle East, the International Energy Agency (IEA) reported Friday. The agency's latest monthly oil market report highlights the market's sensitivity to geopolitical instability, which has severely impacted key shipping lanes.

A Reversal in Demand

The IEA projects that world oil demand will fall by 1 million barrels a day this year compared to the last, marking the first annual contraction since the depths of the COVID-19 pandemic. The agency directly linked the downturn to the closure of the Strait of Hormuz, which has choked off exports through the Persian Gulf.

According to the report, the contraction is "highly skewed in both product and regional terms." While a recovery is underway, the IEA warned that renewed fighting could further cloud the outlook for energy markets.

Forecast Hinges on Regional Stability

The agency's forecast is highly conditional, hinging on the assumption that a ceasefire holds and tanker flows through the strait gradually resume. The IEA noted that while it expects the global oil market to shift back to a surplus by the end of the year, this balance depends on a return to normal shipping operations.

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"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 wrote. The warning comes as oil prices headed for solid weekly gains, with traders weighing the risk of wider conflict against hopes for containment.

Russian Production Outlook Lowered

Separately, the IEA also revised its outlook for Russian oil production downward, citing Ukraine's escalating drone campaign against the country's energy infrastructure. The attacks on refineries, storage, and transport facilities have weakened Russia's supply capabilities.

The agency has cut its Russian supply forecast by 85,000 barrels per day for this year and 150,000 bpd for next year. As a result, the IEA now expects Russian output to average 8.8 million bpd over the forecast period.