The International Energy Agency (IEA) has sharply cut its 2026 global oil supply forecast, now projecting output to fall by 4.3 million barrels per day (bpd) this year as the continued closure of the Strait of Hormuz — through which roughly one-fifth of global oil consumption normally transits — pushes the global market deeper into deficit.

The revised outlook is substantially worse than the 3.7-million-bpd decline the agency projected in July. It would leave global supply at 102.02 million bpd — the IEA's lowest forecast for 2026 to date. Supply is now expected to trail demand by 1.27 million bpd for the full year, compared with the 860,000-bpd deficit implied by the agency's July forecasts.

The shortfall will be even more pronounced during the current quarter. The IEA now anticipates a 1.8-million-bpd deficit between July and September, representing a 1-million-bpd downward revision from July and marking the deepest quarterly oil deficit since the fourth quarter of 2021.

According to the IEA, Middle East oil loadings briefly returned to pre-war levels in early July, reaching 20 million bpd, before declining to 12 million bpd later in the month. For July as a whole, Middle East production remained 8.3 million bpd below pre-war levels.

The agency identified several factors keeping global supply below demand: the Hormuz shutdown, the U.S. blockade of Iranian exports, attacks in the Bab el-Mandeb Strait — a second critical chokepoint linking the Indian Ocean to the Suez Canal and Mediterranean — and reduced exports of Kazakh CPC Blend, the country's primary export crude shipped via the CPC pipeline to the Black Sea.

The supply disruption is also suppressing consumption. The IEA now expects global oil demand to contract by 1.6 million bpd this year, up from the roughly 1-million-bpd decline forecast in July. High prices and limited availability of refined fuels are forcing consumers to reduce usage, particularly in Asia and the Middle East.

Refining capacity has emerged as a significant constraint. Global crude processing fell 5 million bpd year-over-year in July. Russian refinery throughput remained near a 20-year low of 3.9 million bpd following Ukrainian drone attacks, and Russian fuel exports plunged to 1.4 million bpd — nearly half of their July 2025 level.

The prolonged supply shortage is drawing down global inventories. The IEA estimates that global stocks have declined by 410 million barrels since the Iran war began. Observed inventories fell below 7.9 billion barrels in July, the first time they have dropped below that threshold since April 2025.

Looking ahead to 2027, the agency forecasts that supply could exceed demand by 4.61 million bpd. However, that projection is contingent on Middle East hostilities de-escalating and disrupted oil flows recovering.

The latest IEA assessment adds to a growing body of evidence that contradicts U.S. assertions that Middle East oil flows have normalized. Energy Secretary Chris Wright stated Tuesday that total regional oil flows were averaging approximately 15 million bpd and had exceeded pre-war levels on Sunday. However, Kpler reported that its vessel-tracking data could not be reconciled with those figures, and the U.S. Energy Information Administration (EIA) said Hormuz transits remain severely constrained.

The IEA's assessment is available in its Oil Market Report for August 2026.

By Michael Kern for Oilprice.com