Demand disrupted by war, supply set to surge! IEA warns: Oil market will slide towards "significant oversupply" by 2027.

The International Energy Agency (IEA) released a report on Wednesday stating that the oil supply shock triggered by the Iran war has weakened global crude oil demand to some extent. If the conflict can achieve a lasting resolution, the supply may rebound significantly and may lead to a significant oil surplus next year. In its latest monthly oil market report, the IEA significantly lowered its forecast for global daily demand growth in 2026 to 1.1 million barrels, a decrease of 700,000 barrels per day from the previous month's forecast. The report pointed out that the global oil delivery volume plummeted by 5 million barrels per day in the second quarter of this year, which was the main reason for the downward revision. At the same time, global oil production in May fell to 94.5 million barrels per day, a decrease of 600,000 barrels per day compared to the previous month, and a significant drop of 13.6 million barrels per day from the pre-war levels. The IEA predicts that global daily supply in 2026 will decrease by 3.9 million barrels year-on-year, to about 102.4 million barrels, but will rebound strongly to 110.3 million barrels by 2027. The agency pointed out that the decline in demand reflects the double pressure of high fuel prices and shortages of refined oil products, and emphasized that the impact of this geopolitical conflict is no longer limited to simply supply-side shocks. "Significant surplus" on the horizon However, the IEA also stated that by 2027, global supply is expected to increase significantly by about 8 million barrels per day to around 110 million barrels per day, far surpassing the modest recovery level of 2 million barrels per day in daily demand, to 105.3 million barrels at that time. The report states, "Our first assessment of supply and demand balance for 2027 shows that there will be a significant surplus in the market next year." As the report was released, investors were closely monitoring the progress of the agreement between the United States and Iran to end the Middle East conflict, as well as the potential impact of the reopening of the Strait of Hormuz on the energy market. With three Iranian oil tankers carrying nearly 5 million barrels of crude oil breaking through the U.S. Navy's blockade in the Strait of Hormuz, and news of a signing of an agreement between the U.S. and Iran in Geneva on Friday, international oil prices have dropped to their lowest level in three months. On Wednesday, the international benchmark Brent crude oil price closed at $78.44 per barrel, down 0.7%; while the U.S. WTI crude oil futures for July delivery fell nearly 1.1% to close at $75.18 per barrel. The IEA wrote in the report, "If the agreement can be maintained, oil exports and production in the Gulf region should gradually recoverparticularly with the lifting of the U.S. blockade, Iran's oil exports are expected to fully resume." Normalization of supply may take several months The reports authors mentioned that earlier this month, as a result of ship-to-ship transfers in the waters of the Gulf of Oman, the traffic in the Strait of Hormuz has seen a noticeable increase, with total flow rising from a low of 9.6 million barrels per day in May to around 12 million barrels per day. However, the IEA warned that full recovery may not happen overnight. The report added, "Sea mines on the main shipping lanes need to be cleared, and rebuilding the supply chain will also take time." The IEA also expressed cautious views on global oil inventory pressures. Data show that global observed oil inventories decreased by 143 million barrels in May, further expanding from a decrease of 74 million barrels in April. Since the outbreak of the conflict on February 28, global inventories have decreased by approximately 3.8 million barrels per day. The IEA pointed out, "Despite the significant drop in demand for crude oil and refined oil products, the buffering reserves in the system are still being consumed at a record pace. Further reductions in inventories over the next few months could push global oil inventories to historic lows before the global supply and demand balance turns into surplus by the end of the year." Thammas Walger, an analyst at PVM Oil Associates, said that despite the significant decrease in inventories, current oil prices are "approaching" levels before the outbreak of the conflict at the end of February. Walgers analysis stated: "The basic assumption in the current market is that the Strait of Hormuz will reopen and shipping will resume two-way traffic. Regardless of how slow the recovery process is, the gradual restoration of oil circulation will have a substantial impact on market balance. The key question is how much this impact will be."