A new report from the International Energy Agency (IEA), released on August 12, warns that the persistent closure of the Strait of Hormuz and elevated fuel prices are set to drive global oil demand down by 1.6 million barrels per day (bpd) in 2026. This figure represents a further downgrade of 510,000 bpd compared to last month's forecast.

Demand: Continued Pressure in the Second Half, Potential Recovery Next Year

The IEA predicts a significant contraction in global oil demand in 2026. Year-on-year demand is expected to decline by 4.9 million bpd in the second quarter, 2.8 million bpd in the third quarter, before turning positive with a gain of 580,000 bpd in the fourth quarter. A rebound is anticipated in 2027, with demand increasing by 2.4 million bpd. The primary reasons for the downward revision include the ongoing blockade of the Strait, which is disrupting international supply chains and limiting refined product availability, along with high oil prices that are curbing consumption.

Supply: Gulf Production Remains Severely Impacted, Full-Year Supply Declines Sharply

Global oil supply rose by 2.4 million bpd in July to reach 10.15 million bpd, but this was still 6.3 million bpd lower than the same period last year. In the Gulf region specifically, 8.3 million bpd of production remains shut-in. Due to renewed hostilities and shipping disruptions in July and early August, the IEA has cut its third-quarter supply estimate by 1.7 million bpd. The agency now projects that global oil supply will average a decline of 4.3 million bpd in 2026, falling to approximately 102 million bpd. A significant recovery is expected in 2027, with supply bouncing back by 8.3 million bpd to reach 110.3 million bpd.

Refining and Inventories: Product Markets Tighten, Inventories Rapidly Depleted

Global refinery crude throughput in July recovered compared to the previous month but remained nearly 5 million bpd lower year-on-year at 80.9 million bpd. Interruptions to Middle East refined product exports and attacks on Russian refineries have further pressured third-quarter processing estimates. The refined product market is tightening, with crack spreads and refining margins for diesel, jet fuel, and gasoline in the Atlantic Basin hitting record highs. Global observed oil inventories plummeted by 69 million barrels in July, almost entirely due to a reduction in floating storage. Since the start of the conflict, total cumulative inventory draws have reached 410 million barrels, averaging 2.7 million bpd. Total inventories have now fallen below 7.9 billion barrels. The IEA notes that the global oil market is expected to face a supply deficit of 1.8 million bpd in the third quarter, a significant widening from the previous month's estimate of around 800,000 bpd. While a return to surplus is possible by year-end, risks remain high, and the urgency to reopen the Strait of Hormuz is increasing.

Prices: Extreme Volatility

Brent crude oil prices experienced a trading range of nearly $40 per barrel in July. Dated Brent rose by $25.67 over the month, closing at $96.80 per barrel at month-end, and is currently trading near $92 per barrel. Geopolitical uncertainty and tighter market conditions have collectively driven price movements. Overall, the prolonged closure of the Strait of Hormuz remains the single largest source of uncertainty for the global oil market, exerting significant pressure on both the supply and demand sides.