Global Oil Demand Decline in 2026 Driven by US-Iran Tensions and Supply Disruptions
The International Energy Agency (IEA) predicts that global oil demand will decline by 2.5 million barrels per day in 2026. This downward revision of 940,000 barrels per day from the previous month is primarily due to the ongoing deadlock in negotiations between the United States and Iran. The lack of resolution is delaying the normalisation of crude oil flows and exerting downward pressure on prices.
According to the IEA report the decrease in demand will be concentrated mainly in mid-distillates and petrochemical raw materials with notable impacts in Asia. Despite this decline the organisation expects demand to rebound by 2.6 million barrels per day in 2027 slightly offsetting the fall forecast for the current year.
In August global oil production fell by 1.6 million barrels per day to 100.1 million barrels per day as over 10 million barrels per day from the Gulf region remained paralysed due to heightened security risks stemming from the Iran conflict. Ongoing disruptions persist impacting supply levels.
Looking at supply the IEA forecasts a total reduction of 5.7 million barrels per day in global output for 2026 bringing the total to 100.7 million barrels per day. The anticipated recovery of Gulf production is delayed until 2027 with an expected rebound of about 8 million barrels per day then.
Non-OPEC+ production growth will primarily be led by the Americas including the United States Canada Brazil Argentina and Guyana projected to contribute 1.4 million barrels per day in 2026 and a further one million barrels per day in 2027. Meanwhile refinery activity reached a seasonal peak of 81.4 million barrels per day in August a monthly increase of 960 000 barrels but still 4.2 million barrels below the previous year.
The global refining margin margins have hit record levels in the Atlantic basin driven by higher diesel prices while rising freight costs have squeezed refineries in Singapore. These factors contribute to a complex picture of heightened margins and logistical pressures.
Inventories across the globe continued to decline with observed stocks falling by another 95 million barrels in August amounting to a total reduction of 507 million barrels since February — equivalent to an average of 2.8 million barrels per day. Stockpiles stored on ships decreased by 65 million barrels amid renewed attacks affecting tanker traffic from the Middle East.
Outside the Organisation for Economic Co-operation and Development (OECD) inventories fell by 52 million barrels led by China. Conversely OECD inventories increased by 23 million barrels balancing out previous reductions in government reserves. Price dynamics have also shifted; North Sea Dated crude rose by 7.61 dollars in August reaching an average of 91 dollars then surged to 113.48 dollars on September 9.
The market structure has shifted into an extreme backwardation where immediate delivery prices are significantly higher than future prices. This situation reflects a market under tight supply conditions due to disruptions in the Middle East and Russia coupled with demand shifting towards Atlantic basin crudes. Freight costs for ships surged as well driven by increased risks and demand for shipping capacity.
The IEA concludes that the recovery in 2027 will hinge significantly on the evolution of supply interruptions and the outcome of negotiations between Washington and Tehran which could enable the normalisation of crude flows and influence future price trajectories.