Hormuz Strait Remains Closed! IEA Warns of Worsening Oil Shortage in Q3, Inventory Buffer Nearly Depleted

The International Energy Agency (IEA) said Wednesday that the collapse of the U.S.-Iran ceasefire, renewed escalation in the Middle East, and the prolonged inability to restore normal navigation through the Strait of Hormuz are pushing the global oil market into a more severe supply crunch than previously anticipated. The IEA has significantly downgraded its oil supply forecast for this year, estimating that the supply deficit in the third quarter will reach 1.8 million barrels per day—1 million barrels per day higher than last month’s estimate—and marking the largest quarterly shortfall since Q4 2021.

In its latest monthly report, the IEA forecasts that global oil supply in 2026 will decrease by 4.3 million barrels per day (about 4%), up from the July forecast of 3.7 million barrels per day, bringing annual supply down to 102.02 million barrels per day—the lowest forecast the agency has issued for this year to date. Global supply is expected to fall short of demand by 1.27 million barrels per day this year, a gap that has widened from the 860,000 barrels per day implied in the July forecast, potentially making the annual supply-demand imbalance the worst in five years.

Hormuz Strait in Crisis Again: Q3 Deficit More Than Doubles

The U.S. and Iran briefly reached a ceasefire in mid-June, allowing Gulf oil exports to gradually resume. However, about a month after signing a memorandum of understanding on ending hostilities, the ceasefire agreement collapsed again. Attacks on oil tankers in the Strait of Hormuz have reemerged, and the conflict has spread to the Red Sea, with Iran-backed Houthi forces in Yemen continuing attacks.

The IEA notes that global oil supply has clearly fallen below demand due to the blockage of the Hormuz Strait, U.S. sanctions on Iranian oil exports, attacks on the Bab el-Mandeb Strait, and drone attacks in the Black Sea constraining Kazakhstan’s CPC blend crude exports.

Middle Eastern oil loading volumes briefly rebounded to 20 million barrels per day in early July, roughly restoring pre-war transportation levels through the Hormuz Strait. However, by late July, volumes had dropped again to 12 million barrels per day. July’s Middle East production was still 8.3 million barrels per day below pre-war levels, though improved from the peak crisis loss of 14 million barrels per day. A new wave of conflict has disrupted the fragile recovery.

Production rose slightly last month in Saudi Arabia, Iraq, Kuwait, and Iran, but global output remains below pre-war levels. Saudi Arabia and the UAE have used alternative pipelines to transport oil, and shuttle tankers continue to operate through the Hormuz Strait, preventing supply losses from reaching the worst-case scenario seen at the war’s outset. U.S. Energy Secretary Chris Wright said that about 9 million barrels per day of oil have been successfully exported in the past week, roughly half of pre-war flow levels.

Nevertheless, with the Hormuz and Red Sea shipping routes remaining under threat, Saudi Arabia has accumulated record onshore oil inventories. Since the outbreak of the Iran war, global oil inventories have declined by a cumulative 410 million barrels, and the buffers that once cushioned the market are rapidly depleting. IEA member countries such as the U.S., Japan, and Germany will also need to replenish the record emergency stockpiles released in March.

High Oil Prices Suppress Demand: Severe Oversupply Possible Next Year

Tight supply and rising fuel prices are beginning to hit demand. The IEA has expanded its forecast for the decline in global oil demand this year from the July estimate of about 1 million barrels per day to 1.6 million barrels per day—the most severe annual average demand contraction since the 2020 pandemic.

The IEA stated that reduced refining activity in the Middle East and Asia, disrupted shipping through the Bab el-Mandeb Strait, and halted operations at Russian refineries have led to a significant tightening of refined product supply. Naphtha and diesel have been hit hardest, with Asia and the Middle East seeing the largest year-on-year demand declines.

Russia’s refining output remained at 3.9 million barrels per day in July, near a 20-year low, primarily due to Ukrainian drone attacks on most refineries west of the Ural Mountains. As a result, Russian fuel exports dropped to 1.4 million barrels per day—nearly half of last year’s level—while crude oil exports rose to a record high of 4.8 million barrels per day. Global crude processing in July fell by 5 million barrels per day year-on-year. Existing refining capacity cannot compensate for supply bottlenecks, pushing refining margins to record highs.

China’s demand adjustment has provided some market relief. The IEA estimates that the rise of electric vehicles has displaced over 1.5 million barrels per day of oil consumption in China during the second quarter.

The IEA predicts that if tensions ease in the coming months, the oil market could return to surplus by the end of this year, with supply potentially exceeding demand by 4.61 million barrels per day in 2027, allowing global inventories to recover to February 2026 levels by mid-next year. However, the agency warns that with inventory buffers rapidly disappearing, reopening the Hormuz Strait has become more urgent than ever, and market risks remain substantial.