The International Energy Agency (IEA) has projected that global oil demand will decline by one million barrels per day in 2026, the first annual contraction since the COVID-19 pandemic brought the world economy to a standstill in 2020. While the pandemic-era collapse was far steeper—roughly eight million barrels per day at its peak—the current forecast underscores the severe economic damage caused by the closure of the Strait of Hormuz, a critical chokepoint for global energy supplies.
The IEA’s monthly report describes the contraction as “highly skewed in both product and regional terms.” Earlier analysis by the agency traced the sharpest losses to Asia’s import-dependent economies and to petrochemical feedstocks such as naphtha and liquefied petroleum gas, whose supply chains run through the Strait of Hormuz. European refiners, heavily reliant on Gulf crude, have also felt the pinch, with several plants in southern Europe—particularly in Italy, Spain, and Greece—reporting reduced throughput.
June’s Fragile Rebound
Supply improved sharply in June, albeit from a desperately low base. Global production jumped by 4.1 million barrels per day to 98.8 million, as the partial reopening of the Strait of Hormuz allowed Gulf producers to restart shut-in wells. However, output was still running 9.4 million barrels per day below its pre-war level. Gulf exports, including cargoes rerouted around the strait, climbed by 6.5 million barrels per day to 16.1 million. Before the fighting began in late February, the region shipped an average of 24 million barrels per day.
Global oil inventories grew for the first time since US and Israeli strikes on Iran ignited the conflict, halting months of record drawdowns. Yet stockpiles in the wealthiest economies—including those of the European Union, the United Kingdom, and Switzerland—shrank further as buyers held back from importing, wary of supply disruptions and price volatility.
At the time of writing, Brent crude, the international benchmark, was trading at around $76 per barrel, roughly 6% higher than before the US and Israel launched strikes on Iran in late February. That is far below the peaks near $120 reached in March at the height of the conflict. The US benchmark, West Texas Intermediate (WTI), was trading lower at around $72 per barrel.
The Truce Unravels
The IEA’s forecasts rest on an assumption now under visible strain: that a ceasefire holds and the Strait of Hormuz gradually reopens. On that basis, global supply would contract by 3.7 million barrels per day this year, leaving production 860,000 barrels per day short of demand, before expanding by 7.5 million next year and tipping the market into surplus. Stronger output elsewhere and weaker demand than expected before the war could still restore a surplus by the end of the year, allowing countries to rebuild depleted reserves, the IEA noted.
This week brought the second and far larger breach of last month’s truce. After Iranian forces struck three commercial vessels on Monday and Tuesday, US Central Command hit more than 80 targets across Iran, including air defences, coastal radar, and over 60 Revolutionary Guard small boats. Washington also revoked the licence permitting Iranian oil exports. Iran retaliated by firing drones and missiles at Bahrain and Kuwait, causing no major damage, and US President Donald Trump has since declared the ceasefire over.
Tehran insists the only safe passage is the route it sets in the Strait of Hormuz. Traffic fell to 13 tankers on Wednesday, against an average of 33 per day the previous week, according to shipping data from Kpler. The renewed hostilities have sent shockwaves through global energy markets, with European policymakers scrambling to assess the impact on the continent’s energy security.
The crisis comes at a delicate time for Europe, which is already grappling with the economic fallout from the war in Ukraine and the broader shift away from Russian energy. The European Commission has urged member states to accelerate diversification of supply sources, including increased imports from Norway, the United States, and liquefied natural gas (LNG) terminals in the Mediterranean. However, the closure of the Strait of Hormuz threatens to disrupt not only oil but also LNG shipments from Qatar, a key supplier to several European countries.
As the situation evolves, the IEA’s projections may prove optimistic. The agency’s baseline scenario assumes a gradual reopening of the strait, but the latest escalation suggests that a swift resolution is unlikely. For European consumers, the immediate impact is likely to be higher fuel prices and increased volatility in energy markets, compounding the cost-of-living crisis that has already strained households from Lisbon to Warsaw.
