Oil supply crunch worsens as Iran war escalates, IEA says

Oil storage tanks in Yokohama, Kanagawa Prefecture, Japan. (Toru Hanai/Bloomberg)

Global oil markets are undergoing a more severe supply squeeze than expected following renewed escalation in the Iran war, even as demand takes a deeper hit from higher prices, the International Energy Agency said. 

The world faces a shortfall of 1.8 million barrels a day this quarter — more than double earlier projections — as “renewed hostilities and maritime disruptions” derail a production recovery in the Middle East, according to a monthly report from the IEA, which advises major economies. For 2026 as a whole, the deficit will likely be the widest in five years.

Stockpiles are tightening again even as high fuel prices prompt the agency to deepen estimates for a decline in global oil demand this year, by almost 50% to 1.6 million barrels a day. It’s the biggest slump in annual average terms since the 2020 COVID pandemic.

While a brief ceasefire between the U.S. and Iran in mid-June revived oil exports from the Persian Gulf, shipping and regional energy infrastructure are once again under fire. That’s squeezing consumers with higher costs for fuels such as gasoline and diesel — the workhorse of the global economy — and complicating central banks’ struggle with stubbornly high inflation. 

Still, the output losses are far smaller than some of the worst-case scenarios painted early in the war, having been tempered by an array of workaround measures. Those include alternative pipelines used by Saudi Arabia and the United Arab Emirates and a network of shuttle tankers plying the Strait of Hormuz. Energy Secretary Chris Wright said Aug. 11 that 9 million barrels a day have escaped in the past week, almost half prewar volumes.

Renewed Hormuz disruptions have derailed the recovery in oil markets – underscoring the urgency of reopening the Strait.

Diesel, jet fuel & gasoline markets are tightening as reduced Gulf & Russian exports coincide with rising summer travel demand 👇 https://t.co/BhJ3a9a27a — International Energy Agency (@IEA) August 12, 2026

Global oil output continued to recover from war-time lows last month amid increases in production from Saudi Arabia, Iraq, Kuwait and Iran, but still remained short of pre-conflict levels, according to the report. With tanker routes through Hormuz and the Red Sea threatened, the Saudis have built a record trove of onshore stockpiles. 

The world’s depleted inventories ought to be replenished next year after oil markets tip back into oversupply, the IEA said. Supply stands to outpace consumption by a weighty 4.6 million barrels a day in 2027, the report indicated. 

Members of the organization such as the U.S., Japan and Germany will need to refill emergency oil reserves after announcing a record release of stocks in March, the IEA said.

“Although the market is projected to return to surplus toward the end of this year, risks remain substantial and the urgency of reopening the strait has increased, as previously available inventory buffers are rapidly depleting,” the agency said.

Besides the emergency stocks and Hormuz shuttle runs, oil markets have also been shielded from the crisis by demand readjustment in China, the world’s biggest importer of the commodity. More than 1.5 million daily barrels of the country’s consumption was displaced during the second quarter by its expanding fleet of electric vehicles, according to the report.