Global oil markets are beginning to recover from months of disruption, but the International Energy Agency says the outlook remains heavily dependent on whether shipping through the Strait of Hormuz continues to normalize after renewed fighting between the United States and Iran.
In its July Oil Market Report, the IEA said world oil demand is rebounding from a May low as seasonal consumption increases and fuel supplies recover, while crude production and exports from the Persian Gulf have partially resumed following the reopening of the Strait of Hormuz.
However, the agency warned that the latest escalation in hostilities on July 7-8 threatens to derail expectations that global oil markets will return to surplus next year.
“Renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement, which is a must for the normalisation in oil markets,” the report said.
Gulf Oil Flows Recover, But Remain Well Below Pre-War Levels
The IEA estimated global oil supply rose by 4.1 million barrels per day (mb/d) in June to 98.8 mb/d as tankers resumed moving through the Strait of Hormuz and Gulf producers restarted some output.
Even so, global production remained roughly 9.4 mb/d below pre-war levels.
With the United States temporarily easing restrictions on Iranian exports and providing security support for non-Iranian shipping, Gulf oil exports surged by 6.5 mb/d during June to 16.1 mb/d. That marked a significant recovery but remained well below the roughly 24 mb/d exported before the conflict began.
Much of the increase came from crude oil and condensate exports as producers emptied floating storage and onshore inventories accumulated during the disruption. Gulf crude production itself rose by a more modest 3.5 mb/d, leaving output still 11.4 mb/d below pre-war levels.
The rebound in tanker movements also pushed global observed oil inventories higher for the first time in four months. Oil held aboard ships increased by 117 million barrels, more than offsetting continued draws from onshore storage.
Crude Prices Fall as Product Markets Tighten
The return of crude exports sent benchmark oil prices sharply lower during June.
North Sea Dated crude fell by about $31 per barrel during the month, reaching roughly $68 per barrel by early July, its lowest level since January and below pre-war prices.
After fighting resumed this week, prices rebounded to around $77 per barrel.
While crude markets have become better supplied, refined fuel markets remain significantly tighter.
The IEA said Middle Eastern export refineries have yet to fully restart operations, while Ukrainian strikes continue to disrupt Russian refining capacity and fuel exports.
As a result, refinery margins and refined product “cracks” climbed to four-year highs in early July despite falling crude prices. Diesel and gasoline markets remain especially tight, although jet fuel supplies have improved as refiners increase production.
Global refinery throughput rose by 1.5 mb/d in June but remained roughly 6 mb/d below year-earlier levels.
Oil Demand Begins Recovering
The agency said global oil demand reached a low point of 97.9 mb/d in May, down 5.3 mb/d from a year earlier.
Demand is expected to recover steadily through the second half of the year, rising by more than 8 mb/d from May levels by October as peak summer travel combines with pent-up consumption following fuel shortages.
Even with that recovery, the IEA forecasts global oil demand will decline by an average of 1 mb/d during 2026 before rebounding by 2 mb/d in 2027.
Quarterly declines are also expected to ease significantly, from a contraction of 4.8 mb/d during the second quarter to 1.7 mb/d in the third quarter before returning to modest year-over-year growth in the fourth quarter.
Outlook Depends on Strait of Hormuz
The IEA said its supply outlook assumes a gradual recovery in tanker traffic through the Strait of Hormuz, allowing producers to restore output and refiners across the Middle East to resume exports.
Under that scenario, global oil supply would average 102.6 mb/d this year before expanding by 7.5 mb/d in 2027.
But the agency stressed that forecast remains contingent on a rapid de-escalation of the renewed conflict.
“The global oil market balance looks set to swing back to surplus towards the end of the year,” the report said, “but the forecast hinges on the assumption that tanker flows through the Strait will gradually recover.”
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Facts Only
* World oil demand reached a low of 97.9 mb/d in May, a decrease of 5.3 mb/d from a year earlier.
* Global oil supply rose by 4.1 million barrels per day (mb/d) in June to 98.8 mb/d.
* Crude production and exports from the Persian Gulf partially resumed following the reopening of the Strait of Hormuz.
* Gulf oil exports increased by 6.5 mb/d in June to 16.1 mb/d, which was below pre-conflict levels of approximately 24 mb/d.
* Gulf crude production rose by 3.5 mb/d in June, remaining 11.4 mb/d below pre-war levels.
* Oil held aboard ships increased by 117 million barrels in June.
* North Sea Dated crude fell by about $31 per barrel in June to roughly $68 per barrel by early July, which was below pre-war prices.
* Refined fuel markets remain tight because Middle Eastern export refineries have not fully restarted operations and Ukrainian strikes disrupt Russian refining capacity.
* Global refinery throughput rose by 1.5 mb/d in June but remained about 6 mb/d below year-earlier levels.
* The IEA forecasts global oil supply would average 102.6 mb/d this year before expanding by 7.5 mb/d in 2027 under a scenario of gradual recovery.
Executive Summary
Global oil markets are showing signs of recovery from recent disruption, driven by rebounding demand and the resumption of shipping through the Strait of Hormuz, though this outlook remains fragile. World oil demand rebounded from a May low as seasonal consumption increased and supply recovered. Crude production and exports from the Persian Gulf partially resumed following the reopening of the Strait. Despite these recoveries in supply flows, global production remained below pre-war levels.
The recent escalation in hostilities threatens to reverse expectations for surplus oil markets next year, as ongoing fighting highlights the risks to peace necessary for market normalization. While crude prices fell due to increased supply, refined fuel markets remain tight because Middle Eastern refineries have not fully restarted operations and other disruptions persist. Overall demand is projected to recover through the second half of the year, with forecasts showing a potential rebound in oil supply, contingent upon the gradual normalization of shipping routes.
Full Take
The narrative presented balances tangible supply recovery against geopolitical volatility, creating an inherently unstable forecast for oil markets. The key tension lies between the physical movement of oil—facilitated by reopened shipping lanes and increased tanker flows—and the political risk associated with ongoing conflict in the Gulf region. This illustrates a systemic decoupling where logistical realities are pitted against political stability as the primary determinants of market equilibrium.
The data reveals that supply recovery is partial, lagging behind pre-war levels, specifically concerning production capacity and export volumes from the Persian Gulf. Furthermore, the tightening in refined product markets, despite falling crude prices, signals an operational bottleneck outside of simple supply availability; refinery constraints introduce a secondary layer of scarcity irrespective of transit health.
The contingency placed on the Strait of Hormuz normalization is critical. The forecast for a surplus by year-end hinges not just on oil flow but on the assumption of sustained de-escalation. This suggests that market predictions are less about immediate physical flows and more about the perceived stability of the geopolitical structure underpinning those flows. The pattern observed is that economic recovery is directly mediated by security architecture, implying that long-term surplus is a function of peace, not just logistics.
What are the unstated assumptions guiding the projection of supply growth versus the probability of sustained de-escalation? If supply forecasts depend entirely on tanker behavior through a contested strait, it suggests that risk premium in energy markets is currently dominated by geopolitical uncertainty rather than pure supply-demand dynamics. What historical precedents exist for when physical recovery translates into market surplus, and what costs are borne by regions when such stability is absent?
Sentinel — Human
This analysis is a well-structured report synthesizing complex economic statistics and geopolitical dependencies, characteristic of established journalistic reporting rather than purely synthetic generation.