The global oil market is still counting the cost of the war in the Gulf. The International Energy Agency (IEA), in its Oil Market Report for July 2026 released on Friday, said world oil demand is on track to shrink this year for the first time since the depths of the Covid-19 pandemic in 2020 even as supply, prices and refining activity all show early signs of a bumpy recovery.
The IEA expects world oil demand to fall by 1 million barrels per day (mb/d) in 2026 compared with last year ,the first annual decline since 2020. But the fall isn’t steady through the year; it’s sharpest now and fades as 2026 goes on.
As per the Paris based agency the present decline is unusual because it is not being driven only by weak economic activity. The West Asia conflict also disrupted oil production, refinery operations and tanker movement through the Strait of Hormuz.
The primary driver behind this demand destruction was the effective closure of the Strait of Hormuz, a vital maritime choke point that handles over 20 percent of global oil and gas transit.
When a major transit artery closes, it doesn’t just block supply; it breaks downstream demand by physically cutting off refiners that produced refined fuel like petrol, diesel and different forms of aviation turbine fuel from their raw material.
Demand is already recovering
While the IEA in its latest report has forecasted for the absolute global oil demand in 2026 to be lesser than that of 2025, the Paris-based agency has also noticed some subtle signs of recovery of demand in the month of June when demand recovered marginally from its lowest point in May.
As per estimates floated by the agency, the global demand for oil fell to 97.9 million barrels per day in May 2026, down 5.3 million barrels per day from May 2025. The IEA expects demand to recover through the second half of 2026 as supplies improve and summer travel increases.
The agency expects the year-on-year decline to narrow from 4.8 million barrels per day in the second quarter of 2026 to 1.7 million barrels per day in the third quarter. Demand is then expected to rise by 1.2 million barrels per day year-on-year in the fourth quarter of 2026.
While a summer seasonal rebound is underway with global demand expected to jump by 8 million barrels per day from its May lows by October, the underlying structural trend remains fragile and dependent upon an assumption that places re-opening of Hormuz, resumption of tanker flows and refinery operations in the near future.
Hormuz assumption at the centre of the forecast
The IEA’s forecast assumes that tanker traffic through the Strait of Hormuz will gradually return. An outcome that looks increasingly uncertain as the U.S. and Iran exchanged hostilities earlier this week.
Reports of violence and violation of the recently agreed upon ceasefire agreement had surfaced on July 7 and 8 as a number of ships came under attack and traffic through the Strait slowed once again. The Strait is a key route for oil exports from the Gulf. When traffic through it slows, exporters may be forced to cut production because storage tanks begin to fill.
Global oil supply recovered by 4.1 million barrels per day in June 2026 to 98.8 million barrels per day as some shipments resumed. However, despite the marginal improvement, present day global production still remains 9.4 million barrels per day below the pre-war level.
Gulf oil exports rose to 16.1 million barrels per day in June 2026. That was higher than in May, but remained well below the pre-war average of around 24 million barrels per day.
Toril Bosoni, the IEA’s head of oil markets, told CNBC that the recovery would not be “swift or linear” because conditions in the region remained uncertain.
Crude returns faster than petrol and diesel
The recovery has been stronger in crude oil than in refined fuels.
Crude oil must first be processed in a refinery before it becomes petrol, diesel or jet fuel. As per the International Energy Agency, several Gulf refineries and export facilities have been slower to restart because of the uncertainty surrounding the war between US-Israel and Iran.
This explains why crude prices have fallen while petrol and diesel markets remain tight. Global refinery runs rose by 1.5 million barrels per day in June 2026. They were still 6 million barrels per day lower than in June 2025.
As per the Paris based agency one of the core challenges for global energy markets is that of the slow response of refining throughput. Middle East export refineries have yet to fully restart post-conflict as Russian capacity remains marginally reduced by Ukraine’s drone strikes.
The IEA expects the oil market to move towards surplus by the end of 2026 if Gulf exports and refinery operations continue to recover. But the forecast rests on one key assumption that ships gradually keep moving safely through the Strait of Hormuz.
A fresh disruption could again reduce exports, force producers to cut output and keep petrol and diesel supplies tight. For now, the agency’s base case still points to a market swinging back into surplus by the end of 2026, but as its own report puts it, that “hinges on the assumption” that a gradual ceasefire holds.