“An escalation in hostilities on 7-8 July, however, clouds the outlook and could upend the forecast that sees the market flipping to a surplus next year,” the IEA said in its Oil Market Report for July 2026.
Supply recovers but stays below pre-war levels
Global oil supply rebounded by 4.1 million barrels per day (bpd) in June to 98.8 million bpd, the agency said, after a US-Iran ceasefire allowed tankers stuck at the Strait of Hormuz to resume voyages. Despite the jump, world output remained 9.4 million bpd below levels seen before the war, which at its peak had knocked out as much as 14 million bpd of crude flows through the Strait, the IEA said.
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Total Gulf oil exports, including volumes that had been routed around the Strait, surged 6.5 million bpd in June to 16.1 million bpd, still well below the pre-war average of 24 million bpd, the report said. Crude and condensates made up 85 percent of the monthly increase, aided by a drawdown of floating storage and onshore inventories that had built up during the conflict. Gulf production itself rose by a more modest 3.5 million bpd, leaving it 11.4 million bpd short of pre-war output, the IEA said.
2026 and 2027 forecastsThe IEA now expects global oil supply to decline by an average of 3.7 million bpd in 2026, a smaller drop than its earlier forecast of a 3.9 million bpd decline, but cautioned this is contingent on a swift de-escalation of the renewed hostilities. For 2027, the agency projects supply growth of 7.5 million bpd, provided Strait of Hormuz transit volumes continue to improve, alongside demand growth of 2 million bpd.
Prices swing on renewed clashes
Benchmark North Sea Dated crude fell $31 a barrel over the course of June to around $68 a barrel, its lowest level since January and about $2 below pre-war levels, as the ceasefire underpinned recovering flows through the Strait, the IEA said. Prices rose again after hostilities resumed on 7-8 July, with dated crude trading at around $77 a barrel at the time the report was published.
Refined products still tight
While crude flows have recovered to nearly three-quarters of pre-war rates, Gulf exports of refined products and LPG remained less than half their pre-war levels in June, the IEA said, as key export refineries in the region had yet to resume operations. Intensifying Ukrainian attacks on Russian refineries and export infrastructure further tightened product markets in Russia and beyond, the agency said.
Refined product cracks and refinery margins climbed to four-year highs in early July as a result of the disconnect between well-supplied crude markets and tight product markets, the report said. Global refinery runs rose 1.5 million bpd in June but were down 6 million bpd year-on-year, with Middle East export refineries yet to restart and Asian refiners still running at reduced rates. The IEA expects global refinery runs to fall 2.4 million bpd in 2026 before rebounding 3.1 million bpd in 2027.
Demand recovery underway
Global oil demand, which bottomed at 97.9 million bpd in May, a decline of 5.3 million bpd year-on-year, is recovering on seasonal trends and pent-up demand, the IEA said. The agency expects demand to rise more than 8 million bpd by October, pushing it above 2025 levels for the first time since February. Even so, global oil demand is projected to decline by 1 million bpd for 2026 as a whole, before rebounding by 2 million bpd in 2027.
Inventories rise for first time in four months
Global observed oil inventories rose 21 million barrels in June, the first increase in four months, as a sharp rise in oil-on-water volumes of 117 million barrels outpaced continued draws in onshore tanks of about 96 million barrels, including 44 million barrels of OECD government stock releases, the IEA said. OECD stocks overall fell 62 million barrels in June, following a 73 million barrel decline in May. Non-OECD crude stocks eased by 37 million barrels, led by a 41 million barrel draw in China.
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Outlook hinges on lasting peace
The IEA said its forecast of a return to surplus by late 2026 depends on tanker flows through the Strait of Hormuz continuing to recover, allowing producers to restart fields and refiners to resume product shipments. “Renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement, which is a must for the normalisation in oil markets,” the agency said.