Global oil markets are facing a more severe supply crunch than anticipated following the escalation of the Iran war, despite a deeper hit to demand due to elevated prices, according to the International Energy Agency (IEA). The IEA, which advises major economies, reported a projected shortfall of $1.8 million barrels a day this quarter, more than double previous forecasts. This deficit is largely attributed to "renewed hostilities and maritime disruptions" hindering production recovery in the Middle East. The agency predicts that for 2026 as a whole, the deficit will be the widest in five years.
In related developments, the IEA previously warned that the war in the Middle East was the largest-ever oil supply disruption. It now foresees a larger drop in demand, predicting an $80,000 barrel per day drop in demand growth for this year, a stark contrast to its March projection of a $640,000 barrel per day rise. The IEA's overall forecasts suggest that supply will exceed demand by only $410,000 barrels per day in 2026, a significant downturn from the $2.46 million barrels per day surplus initially projected. The agency emphasized that resuming flows through the Strait of Hormuz is crucial for easing pressure on energy supplies, prices, and the global economy. Supply is expected to fall by $1.5 million barrels per day this year due to strikes on Middle Eastern energy assets and Iran's effective closure of the Strait of Hormuz, impacting production and exports.
The war has also impacted specific producers. Saudi Arabia reported to OPEC that its crude oil production plunged again last month, hitting its lowest level since 1990 due to renewed hostilities between the US and Iran and squeezed export routes. Riyadh notified OPEC that its output tumbled by $1.9 million barrels a day to $6.238 million a day. The UAE's crude and liquids production also fell by $190,000 barrels per day to $4.7 million barrels per day in July, including $3.9 million barrels per day of crude, as attacks on shipping limited off-take. Qatar faces an estimated $910,000 barrels per day loss in 2026.
Oil prices have reacted to these disruptions, with major benchmarks on track to end the week above $100 a barrel for the first time in nearly four months, primarily due to increasing attacks along key shipping routes in the Middle East. US diesel prices have surged past $6 a gallon for the first time. The IEA is now projecting a $4.3 million barrel per day decline in global supply, $600,000 barrels per day deeper than its forecast a month ago. Global supply is expected to average $102 million barrels per day this year.
