IEA: Global Oil Demand to Fall in 2026

The International Energy Agency’s (IEA) July Oil Market Report reveals that global oil demand is on track to contract by 1MMb/d this year. This marks the first annual decline in consumption since the 2020 COVID-19 pandemic, primarily driven by severe shipping disruptions in the Strait of Hormuz during the five-month conflict involving the US, Israel, and Iran. While a temporary June ceasefire permitted a brief 4.1MMb/d production rebound, the sudden collapse of diplomatic negotiations and renewed attacks on commercial vessels in July have thrown the IEA's projected market recovery into deep uncertainty. Compounding the crisis, global emergency crude stocks are being depleted at a historic pace, with OECD government inventories plummeting to their lowest levels since December 1990 to offset systemic fuel shortages.

Global demand for oil is poised to fall by one million barrels per day this year as war in the Middle East strangles the flow of oil from the region, the first annual contraction in demand since the COVID-19 pandemic froze the global economy in 2020. The International Energy Agency published this finding in its July Oil Market Report on Friday, July 10, delivering the most comprehensive quantitative assessment yet of how the five-month US-Israeli conflict with Iran has reshaped the global energy market, and what it means for the trajectory of oil prices, supply, and demand through the end of 2026.

The IEA said the contraction is "highly skewed in both product and regional terms," as the closure of the Strait of Hormuz disrupted exports through the Persian Gulf. The agency warned that "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 Numbers Behind the Demand

The forecast is for a decline by 1.1MMb/d year-on-year in 2026, a downgrade of 700Mb/d compared with the May report, as second-quarter deliveries plunged by 5MMb/d year-on-year in the face of higher fuel prices and disruptions to product availability. The IEA expects demand to rebound to 2MMb/d growth in 2027 as a normalization of trade flows, lower oil prices, and an improving economic outlook contribute to the recovery.

A recovery in global oil demand from a low of 97.9MMb/d in May is underway, the IEA said, driven by the peak summer travel season and the release of pent-up demand following a partial reopening of the Strait of Hormuz. Global production jumped by 4.1MMb/d in June to 98.8MMb/d as the partial reopening allowed Gulf producers to restart shut-in wells, though output was still running 9.4MMb/d below its pre-war level.

The Ceasefire That Is Now "Over"

The IEA's July report was published into a dramatically deteriorating diplomatic environment. After Iranian forces struck three commercial vessels on Monday and Tuesday, US Central Command hit more than 80 targets across Iran, including air defences, coastal radar and over 60 Revolutionary Guard small boats, while Washington revoked the licence permitting Iranian oil exports. Iran fired drones and missiles at Bahrain and Kuwait. US President Donald Trump has since declared the ceasefire over.

Trump declared the ceasefire is "over," canceling the permit that had allowed Iranian crude to reach international buyers. Toril Bosoni, who heads oil markets at the IEA, cautioned that any upturn would be neither "swift or linear" given what she called a "very uncertain and unstable" environment.

The ceasefire revocation, just 16 days after the US Treasury's General License X was issued authorizing Iranian oil sales, itself revoked on July 7 after the first tanker attacks, means that both the diplomatic and commercial normalization the IEA's forecast assumes are now in active doubt. The trajectory described in the report, from the 4.8MMb/d demand collapse in 2Q26 to recovery in 4Q26, assumes that tanker flows through the Strait gradually recover. They are not currently recovering.

The Inventory Crisis Behind the Numbers

Despite the significant reductions in demand for crude oil and refined products, the buffers in the system continue to erode at a record pace. Global observed oil stocks declined by 3.8MMb/d on average since the start of the war, with a draw of 143MMb in May. OECD government inventories fell to their lowest level since December 1990 as the pace of emergency stock releases accelerated.

Observed global inventories fell by 143MMb in May, accelerating the 74MMb draw in April. "Further declines in the coming months could still take global oil stocks to historic lows before the market balance shifts to surplus towards the end of the year," the IEA observed.