Oil supply crunch deepens as Iran war escalates, IEA warns

Global oil markets are facing a sharper supply squeeze than anticipated following renewed escalation in the Iran war, the International Energy Agency (IEA) reported. The agency now estimates a shortfall of 1.8 million barrels a day for this quarter—more than double its earlier forecast—due to “renewed hostilities and maritime disruptions” that have derailed oil production recovery in the Middle East. For 2026, the deficit is expected to be the widest in five years.

Despite high fuel prices dampening demand, global oil demand growth estimates for 2026 have been slashed by nearly 50% to 1.6 million barrels a day, marking the biggest annual average decline since the 2020 COVID-19 pandemic. While a brief ceasefire in mid-June temporarily revived Persian Gulf oil exports, shipping and regional energy infrastructure are once again under threat, pushing fuel costs higher for consumers and complicating central banks’ efforts to curb inflation.

The IEA noted that output losses remain smaller than worst-case scenarios from earlier in the war, thanks to workaround measures such as alternative pipelines used by Saudi Arabia and the United Arab Emirates, as well as a network of shuttle tankers navigating the Strait of Hormuz. Energy Secretary Chris Wright stated that 9 million barrels a day escaped the region in the past week—nearly half of prewar volumes.

Global oil output recovered slightly last month with increases from Saudi Arabia, Iraq, Kuwait, and Iran, but it still fell short of pre-conflict levels. With tanker routes through the Strait of Hormuz and the Red Sea under threat, Saudi Arabia has amassed a record volume of onshore stockpiles. The IEA projects that oil markets will tip back into oversupply in 2027, with supply exceeding demand by 4.6 million barrels a day.

The agency emphasized the critical need to reopen the Strait of Hormuz, warning that previously available inventory buffers are rapidly depleting. Members of the IEA, including the U.S., Japan, and Germany, will need to refill emergency oil reserves after announcing a record release of stocks in March. The crisis has also been mitigated by demand adjustments in China, the world’s largest oil importer, where over 1.5 million barrels of daily consumption were displaced in the second quarter by the expansion of its electric vehicle fleet.