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IEA Cuts Oil Demand Outlook as US-Iran Deadlock Seen Impacting Production

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IEA Cuts Oil Demand Outlook as US-Iran Deadlock Seen Impacting Production

The International Energy Agency on Friday projected a steeper contraction in oil demand this year as the Middle East conflict is expected to hamper production and push energy prices higher.

The agency expects oil consumption to decline by 2.5 million barrels a day in 2026, about 940,000 barrels more than its prior estimate.

The ongoing deadlock in US-Iran negotiations postpones the potential recovery of oil flows into next year, with supply losses centered on middle distillates and petrochemical feedstocks in Asia, according to the IEA.

"With the protracted US-Iran diplomatic standoff and renewed attacks in both the Gulf and the Red Sea's Bab el-Mandeb choke point continuing to hamper the normalization of oil flows, we have further cut our supply and demand projections for the remainder of the year," the IEA said.

Tensions recently flared up between Washington and Tehran, sparking fears of prolonged supply disruptions and sending oil prices over $100 a barrel this week. Brent and West Texas Intermediate were falling on Friday, but are up more than 15% each in September so far following two back-to-back monthly gains.

Prices for diesel and gasoil, which make up nearly 30% of global demand, surpassed $200 per barrel in the US in early September, 94% above pre-war levels, according to the IEA report.

Diesel prices in the US surged past $6 per gallon for the first time ever on Friday amid concerns over energy supply disruptions, according to AAA motor club data.

"The rise in both crude futures and physical prices pales in comparison with those for refined products, where market tightness is now most acute," the IEA wrote.

The agency expects global oil demand to rise by 2.6 million barrels per day in 2027.

Global oil supply is projected to decline by 5.7 million barrels a day to 100.7 million barrels in 2026. The IEA previously expected supply to fall by 4.3 million barrels a day.

Total oil production slid in August as more than 10 million barrels a day of Gulf output remained shut in amid heightened security risks, the IEA said Friday. Oil inventories across the world have depleted by 507 million barrels since the Iran war began at the end of February.

A full recovery in supplies from Middle Eastern producers will be deferred until 2027, according to the IEA report.

The Organization of the Petroleum Exporting Countries lowered global oil demand projections for 2026 on Thursday amid high energy prices.

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