Global oil supply is expected to fall significantly short of demand in 2026 as the ongoing conflict involving Iran disrupts production and shipments from the Middle East, according to the International Energy Agency (IEA). The agency’s latest monthly report warned that the market will remain “severely undersupplied” through at least the third quarter of the year, even if hostilities were to end imminently.

The conflict, which involves the United States and Israel in military action against Iran, has inflicted substantial damage on oil infrastructure within Iran and neighboring Gulf countries. This has effectively closed the Strait of Hormuz—a crucial chokepoint for global energy shipments—leading to an unprecedented supply shock. The IEA reported that more than 14 million barrels per day (bpd) of oil remain shut-in, amounting to cumulative supply losses exceeding one billion barrels since the crisis began.

In response, global oil inventories have been drawn down at a record pace, averaging declines around four million barrels per day during March and April. The agency coordinated the release of 400 million barrels from strategic reserves among member countries such as the United States, Germany, and Japan, with approximately 164 million barrels already distributed into the market. Nonetheless, the drawdown has erased the global supply glut that had been forecast prior to the conflict.

The IEA’s revised forecast projects a shortfall of approximately 1.78 million bpd in 2026, reversing earlier expectations of surplus production. The second quarter alone could experience a deficit as high as six million bpd. The agency anticipates a gradual resumption of oil flows through the Strait of Hormuz beginning in the third quarter, potentially allowing the market to return to a modest surplus by the final quarter of the year and for stocks to start rebuilding.

The supply disruptions have also exerted downward pressure on oil demand, leading the IEA to reduce its consumption forecasts for 2026 by 420,000 bpd, a larger decline than previously expected. This reflects demand destruction driven by soaring prices, constrained availability of feedstocks for petrochemicals, and reduced activity in sectors such as aviation. The agency noted these conditions represent the steepest quarterly consumption drop since the 2020 COVID-19 pandemic.

Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) has reported declining production among some of its Middle Eastern members due to the conflict but maintains a somewhat more optimistic view regarding demand, still projecting growth for the year. OPEC+ output stood at 33.19 million bpd in April, which falls short of anticipated demand levels—adding to concerns about market imbalances.

The IEA has deferred the release of its 2027 supply and demand outlook—which was originally scheduled for April—and its annual oil market report, now pending publication next month or later. The unfolding situation continues to fuel volatility in oil prices, which surged to four-year highs exceeding $126 per barrel during the peak of the supply crisis before easing to around $106 per barrel recently amid stalled diplomatic efforts to resolve the conflict.