Global oil supply is expected to fall short of total demand this year as the ongoing conflict involving Iran severely disrupts Middle East oil production and rapidly depletes global inventories, according to the latest report by the International Energy Agency (IEA). The Paris-based energy watchdog has sharply revised its earlier outlook, which had projected a supply surplus. However, escalating tensions between the US, Israel, and Iran have now created what the agency describes as one of the largest oil supply crises in history.
Strait of Hormuz disruption intensifies supply shock
The conflict has significantly damaged oil infrastructure in Iran and neighbouring Gulf countries, while tanker movement through the strategically critical Strait of Hormuz remains heavily restricted. According to the IEA, cumulative supply losses from Gulf producers have already crossed one billion barrels, with more than fourteen million barrels per day (bpd) of oil production currently shut in.
IEA reverses earlier surplus forecast
The IEA now estimates that global oil supply will remain around 1.78 million bpd below total demand in 2026. This marks a dramatic reversal from the agency’s previous forecast of a 410,000 bpd surplus issued last month and nearly 4 million bpd surplus projected in December.
The agency further warned that the market could remain severely undersupplied through the third quarter of 2026, even if the conflict eases in the coming months. The second-quarter supply deficit alone could reach nearly 6 million bpd.
However, the IEA expects some gradual recovery from the third quarter onward if tanker movement through the Strait of Hormuz resumes. Under its base-case scenario, the market could return to a modest surplus by the fourth quarter, helping rebuild depleted inventories.
Oil inventories witness record drawdown
The supply crisis has already caused a massive 246 million barrel drawdown in global oil inventories during March and April, the IEA said. The agency warned that shrinking inventories could increase oil price volatility, particularly ahead of the peak summer demand season. To stabilise global markets, the 32-member IEA coordinated the release of 400 million barrels of oil from strategic reserves in March — the largest emergency release in its history. Of this total, nearly 164 million barrels have already been released into the market.
Global oil supply outlook sharply downgraded
The IEA now expects global oil supply to decline by around 3.9 million bpd across 2026 due to the ongoing war, substantially higher than its earlier estimate of a 1.5 million bpd drop. At the same time, weakening economic activity and higher crude prices are beginning to reduce fuel consumption worldwide. The agency revised its oil demand forecast and now expects demand to fall by 420,000 bpd this year, compared to its earlier estimate of an 80,000 bpd decline. According to the IEA, sectors such as petrochemicals and aviation are currently experiencing the greatest impact from high oil prices and supply disruptions. “The petrochemical and aviation sectors are currently most affected, but higher prices, a weaker economic environment and demand-saving measures will increasingly impact fuel use,” the agency said.
OPEC also lowers outlook
OPEC also highlighted declining oil output in its latest report, noting that the Iran conflict continues to restrict exports from key Middle Eastern producers. Although OPEC reduced its global oil demand forecast for 2026, the organisation still expects overall demand growth this year, unlike the IEA. Data from the report showed that OPEC+ – which includes Russia and allied producers – pumped only 33.19 million bpd in April, reflecting further production declines due to disruptions around the Strait of Hormuz. As reported by reuters.com, OPEC estimates that demand for OPEC+ crude will average 42.7 million bpd in 2026, indicating a significant gap between current production and future market requirements.
