The IEA Forecasts Global Oil Demand To Fall By 2.5m Barrels A day By Q4

The International Energy Agency (IEA) fresh report has predicted a drop in global oil demand  as the Iran war manifests itself through restricted product availability, soaring fuel prices and a deteriorating economic outlook

According to the IEA, world oil demand is forecast to fall by 2.5 million barrels a day (mb/d) in fourth quarter of 2026 and 2.6 mb/d on average in 2026. 

It said that diesel will register 25 per cent of the drop. A partial recovery, of 2 mb/d, will leave 2027 global oil use 620 kb/d, or 0.6 per cent below 2025 levels.

In its oil market outlook the agency noted that global  oil supply increased by 2.5 mb/d m-o-m to 102.3 mb/d in September, driven by Gulf producers. 

The report further shows that the Organization of Petroleum Exporting Countries (OPEC+ ) gains of 2.1 mb/d were led by Saudi Arabia, while the UAE drove non-OPEC+ increases. 

Oil supply is projected to post an average annual decline of 5.8 mb/d, to 100.7 mb/d, this year, before reversing course and rising by 7.7 mb/d in 2027. Renewed attacks in the Gulf leave the recovery fragile.

The report said that global refinery runs are set to hit a seasonal low of 81.3 mb/d in October before rebounding to 84.6 mb/d by year-end. 

Record freight and crude costs crushed margins in Europe and Asia, while discounted feedstocks propelled US margins to new highs. Global runs will drop by 2.3 mb/d, to 81.7 mb/d, this year, and rise by 2.8 mb/d in 2027.

Diesel markets remained under significant strain as prolonged supply disruptions forced counter-seasonal stock draws ahead of autumn refinery maintenance and peak winter demand. Global diesel exports in September were 700 kb/d lower y-o-y, as a 1.3 mb/d loss from Russia and the Middle East was only partly offset by higher supply from other sources.

Global observed oil inventories edged down by 10 mb in September as a further 113 mb decline in on-land stocks was largely offset by a surge in oil on water. Non-OECD crude stocks slumped by 76 mb, with China accounting for 78 per cent of the decline, while OECD inventories dropped by 37 mb. Global stocks were 509 mb (-2.4 mb/d) lower than at end-February.

North Sea Dated crude soared by $26.17/bbl m-o-m to $116.89/bbl in September, as renewed Middle East hostilities disrupted supplies and Asian refiners accelerated purchases. The 11 September bombing of the Saudi East-West Pipeline and an exponential rise in freight rates compounded the rally. At the time of writing, Dated was trading around $134/bbl.

The IEA report noted that recovery in Middle East oil supply was well underway in September, with Gulf crude oil exports approaching pre-war levels. 

However, the recent escalation in attacks on regional energy infrastructure and tanker traffic is threatening to derail further gains. At the same time, record tanker rates raised crude delivery costs and eroded refinery margins. Brent crude futures have risen by 13 per cent since the start of September to around $107/bbl. Physical markers have increased much more, with North Sea Dated up by 43% to $134/bbl and other North Sea grades trading up to $160/bbl.

Crude oil exports from Gulf producers, led by Saudi Arabia, surged by 4.4 mb/d to 13.9 mb/d in September, reaching over 75 per cent of pre-war levels as supply recovered strongly and inventories were drawn down. 

Robust Gulf of Oman ship-to-ship transfers helped lift total oil flows through the Strait of Hormuz by 3.7 mb/d to 10.9 mb/d, while the swift return of East-West pipeline flows increased overall bypass exports by 970 kb/d to 5.6 mb/d. 

According to the report, the strong rebound raised estimated global supply for 3Q26 by 190 kb/d compared with last month’s Report. 

The report further shows that due to heightened security concerns amid increased Houthi attacks in the region in October, it left the projections for the remainder of the year largely unchanged. As such, global oil supply is expected to average 101.4 mb/d over the second half of the year, up from 96.4 mb/d in 2Q26.

Refined product and Liquified Petroleum Gas (LPG) shipments from the Middle East have risen much more slowly than crude oil flows and remain below half of their pre-war levels. Refined products rose by 210 kb/d to 1.9 mb/d in September, while LPG increased by 90 kb/d to 670 kb/d – from pre-war levels of 4.7 mb/d and 1.5 mb/d, respectively. Continued disruptions to Middle East exports, compounded by lower supply from Russia and some Asian countries, cut global diesel/gasoil availability by 1.5 mb/d in 2Q26 and 1.7 mb/d in 3Q26 compared with a year earlier, putting diesel markets under extreme pressure.

While global diesel prices have eased from the all-time highs of more than $200/bbl reached in September, benchmarks remain nearly double the price of crude oil and their pre-crisis levels. Record diesel prices are already having broad economic consequences by raising the cost of goods and impacting real incomes, economic activity, and inflation. Following year-on-year contractions of 5 mb/d in 2Q26 and 3.7 mb/d in 3Q26, global oil demand is set to decline by 2.5 mb/d in 4Q26. This is forecast to result in an annual drop in global demand of 2.6 mb/d, to 102.4 mb/d, as high prices and a deteriorating economic outlook in some countries weigh on consumption.

Meanwhile, despite lower demand, oil market balances are forecast to remain in deficit through the end of the year, with constrained middle distillate supplies likely to persist well into 2027. 

Global observed oil stocks edged down in September, as a 103 mb surge in oil on water amid a sharp rise in Gulf exports was more than offset by a further 113 mb decline in on-land inventories. Cumulative global observed inventories were a steep 509 mb below pre-war levels by the end of September, with on-land stocks hovering at their lowest levels since at least 2016. 

As the remaining buffers in the system continue to erode, in the absence of a resolution to the conflicts in the Middle East, oil markets may experience more turmoil in the months ahead before any eventual surplus emerges in 2027.