IEA forecasts first annual global oil demand decline since 2020

Global oil demand is on track for its first annual decline since the pandemic year of 2020, the International Energy Agency said, as a resumption of flows through the Strait of Hormuz floods the market with supply while geopolitical risks persist.

The IEA forecast the first annual decline in global oil demand since 2020, as a supply recovery from the reopening of the Strait of Hormuz collides with lingering geopolitical uncertainty that threatens to upend the market's path to surplus. Global oil supply rose 4.1 million barrels a day in June after the June 18 US-Iran agreement reopened the strategic waterway, but remained 9.4 million bpd below pre-conflict levels, the Paris-based agency said Friday.

"An escalation in hostilities on 7-8 July, however, clouds the outlook and could upend the forecast that sees the market flipping to a surplus next year," the IEA said in its monthly oil market report.

The agency predicts supply will expand by 7.5 million bpd in 2027, contingent on sustained Hormuz transits. Brent crude traded near $72 a barrel Friday, down from spikes above $100 during the peak of the crisis, while the US Energy Information Administration sees Brent averaging $74 in the third quarter and declining to $65 in 2027 as global inventories build. OPEC+ has agreed to increase production by 188,000 bpd starting in August, adding further downward pressure on prices.

The demand decline — the first since the 8.6% collapse in 2020 — signals a structural shift in energy consumption patterns, with the IEA's data also showing global gas demand set to fall 0.5% this year. Lower crude prices are expected to reduce US retail gasoline to about $3.60 a gallon in the second half of 2026, providing a tailwind for transportation and logistics sectors while potentially giving central banks room to ease monetary policy. But the IEA warned that renewed hostilities between the US and Iran could quickly erase the projected surplus, leaving the market vulnerable to another supply shock.

Supply Recovery Meets Demand Destruction

The reopening of the Strait of Hormuz in mid-June restored a conduit that typically handles 20% of the world's LNG supply and a significant portion of crude flows. LNG supply from Qatar and the United Arab Emirates had dropped by about 80% during the four-month closure compared with the same period in 2025, while wholesale natural gas prices more than doubled.

The EIA now expects US crude production to average 13.8 million bpd in 2026 and 14 million bpd in 2027, up from 13.6 million bpd in 2025. Record US natural gas output is also expected to support growing demand while keeping Henry Hub spot prices at an average of $3.67 per million British thermal units in 2026.

What's at Stake for Global Markets

The demand decline carries implications beyond oil markets. Lower energy costs are disinflationary, potentially accelerating the timeline for rate cuts by the Federal Reserve and other central banks. The European Central Bank, which had been navigating the inflationary shock from the Iran conflict, may find renewed room to ease.

Yet the fragility of the recovery was underscored by the IEA's warning that the July 7-8 escalation in US-Iran hostilities could derail the entire surplus scenario. If Hormuz transits are again disrupted, the projected 7.5 million bpd supply expansion for 2027 would be at risk, the agency said.

This article is for informational purposes only and does not constitute investment advice.