Brent crude has pulled back sharply after touching the $110 per barrel threshold, with the International Energy Agency simultaneously issuing a warning that the ongoing Iran conflict continues to weigh on global oil demand. The agency reports that this year's demand contraction has already become the largest since the onset of the COVID-19 pandemic, with further weakening anticipated in the months ahead.

According to a Bloomberg report, the IEA's September monthly report has revised its forecast for this year's global oil demand decline upward to 2.5 million barrels per day, deepening the previous month's projection by 940,000 barrels. This marks the steepest annual average demand drop since the pandemic shock of 2020.

The IEA no longer anticipates that the Strait of Hormuz will reopen to shipping this year, and cautions that with supplies remaining constrained and commercial inventory buffers rapidly depleting, "further demand compression may be required in the coming months to bridge the supply-demand gap." The agency characterizes 2026 and 2027 as a "lost period" for global oil demand growth.

In response to these warnings, Brent crude futures tumbled approximately 3.5% from their intraday high near $110, settling around $103 per barrel. Despite this pullback, oil prices are still on track for their largest weekly gain since July, with year-to-date gains exceeding 70%.

Supply Deficit Widens as Inventories Decline at Record Pace

In its report, the IEA has downgraded its forecast for this year's average annual global oil supply decline to 5.7 million barrels per day, a further reduction of 1.3 million barrels from the previous month's projection, while pushing the expected supply recovery to next year. Combining both supply and demand factors, the global oil supply deficit for this year is projected at approximately 1.75 million barrels per day, up from the 1.3 million barrels per day forecast in last month's report.

The IEA characterizes this crisis as a "record-breaking supply disruption."

Report data indicates that between February and August this year, global oil inventories declined at an accelerating pace of 2.8 million barrels per day. Inventories are expected to continue falling in the fourth quarter, a reversal from the IEA's earlier projection of a modest rebound during that period. The agency's August report had anticipated the market would return to a supply surplus by year-end, a conclusion that has now been entirely overturned.

Hormuz Crisis Disrupts Flow, War's Impact on Supply Outweighs Demand Side

The IEA points out that this conflict's impact on oil flows has been even greater than its effect on consumption, which is the core reason the supply deficit continues to widen. The strategic Strait of Hormuz waterway remains persistently obstructed, with attacks on energy infrastructure extending from the Persian Gulf to the Russia-Ukraine battlefield.

According to Bloomberg, Iran-backed Houthi rebels have claimed responsibility for striking Saudi Arabia's East-West pipeline, which connects to Red Sea export terminals and serves as a critical alternative route bypassing the Strait of Hormuz. Meanwhile, Houthi forces have advanced toward coastal areas adjacent to the strategically vital Bab el-Mandeb Strait, approaching the port of Mocha in the southern Red Sea. Saudi oil production fell again last month, reaching its lowest level since 1990.

Helima Croft, an analyst at RBC Capital Markets, wrote in a research note: "The re-emergence of a full-scale war between Saudi Arabia and the Houthis could act as a catalyst triggering our high oil price scenario."

Diesel Shortage Hits Global Markets, Asian Petrochemical Sector Bears the Brunt

The IEA warns that the scale of the shock to oil demand in 2026 could rival the four largest energy crises of the past six decades, with the most concentrated impact falling on middle distillates such as diesel, as well as feedstock supplies for Asian petrochemical plants.

The diesel shortage has triggered ripple effects worldwide. US diesel crack spreads currently stand at approximately $110 per barrel, with the national average retail price for industrial diesel reaching a record high of $6 per gallon. Some gas stations in California have already surpassed $9.99 per gallon.

Hamad Hussain, a commodities analyst at Capital Economics, cautions that depleted inventories combined with early signs of demand recovery in China have made oil prices highly sensitive to any new disruption in Middle East supply. Jeff Currie, former head of commodities at Goldman Sachs and current head of Real Macro, told CNBC that Chinese buyers are actively bidding for crude in the market, stating, "I actually place greater weight on China's return to the market."

Diplomatic Efforts Show Signs of Progress, Markets Closely Monitor Gulf Situation

Amid intensifying geopolitical tensions, a glimmer of diplomatic easing has emerged. According to Bloomberg, the six Gulf Cooperation Council nations are considering holding talks with Iranian officials next week, with discussions focused on navigation issues in the Strait of Hormuz.

Justinus Steinhorst, an analyst at UBS, noted in a research report: "Brent crude is holding above $105 against the backdrop of dual chokepoint concerns arising from Houthi activity and the Bab el-Mandeb situation, while 10-year German Bund yields have risen to their highest level since 2009, and 10-year US Treasury yields are approaching the 5% threshold."

The core contradiction confronting the market lies in the fact that the war's destruction of supply far outpaces the natural speed of demand-side adjustment. With the IEA's latest warning, passive demand compression may become the only avenue for balancing the market while the outlook for supply recovery remains unclear.