EIA: Oil demand likely to fall further the longer Iran conflict persists

June 12 ------ Global oil markets continue to face heightened volatility and uncertainty as the Strait of Hormuz, a critical global oil transit chokepoint, remains effectively closed more than three months after military action began on 28 February.

According to the U.S. Energy Information Administration’s (EIA) short-term energy outlook, since then, shipping traffic through the waterway has been severely restricted. Brent crude oil spot prices averaged $107 per barrel in May, down $10 per barrel from April, marking the first monthly decline since December 2025.

Despite continued volatility, prices eased on reports that the United States and Iran were nearing an agreement to extend a ceasefire and potentially reopen the strait pending further negotiations, although no deal has yet been finalized.

Most oil production in the region remains shut in, while global inventories have continued to decline to meet demand. Although limited vessel transits have taken place in recent weeks, the Strait of Hormuz is assumed to remain effectively closed into early summer, with a gradual resumption of flows expected in the third quarter of 2026. "Under this scenario, production and trade patterns are not expected to return to pre-conflict levels until early 2027, with some producers in the Persian Gulf unlikely to restore output to previous levels within the forecast period," EIA noted.

Crude oil production outages in the Middle East have also increased, with shut-in volumes estimated to have averaged 11.3 million barrels per day in May. Further increases are expected through the second quarter of 2026 as storage constraints—particularly in Iran—reach capacity, forcing additional production shutdowns as the disruption to the strait continues. Furthermore, global oil inventories are expected to tighten significantly as the conflict-driven disruption to supply persists, reversing earlier expectations of stock builds following a period of global oversupply. OECD liquid fuels inventories are forecast to fall to just under 2.3 billion barrels by December 2026, their lowest level since 2003 and well below the five-year average.

On a days-of-supply basis, stocks are projected to decline to around 50 days by the end of 2026, also the lowest level in more than two decades, with no recovery to pre-conflict levels expected within the forecast period.

The drawdown in inventories is expected to keep oil prices elevated through 2026. Brent crude is forecast to average around $105 per barrel in mid-2026 before easing to about $89 per barrel by the fourth quarter as supply gradually returns with the reopening of the Strait of Hormuz and the restart of shut-in production. Prices are then expected to decline further in 2027, averaging around $79 per barrel, as global supply normalizes, inventories rebuild and most disrupted production comes back online.

Global oil consumption

High fuel prices, reduced fuel availability and government measures to curb consumption have contributed to a decline in oil demand. The reduction in demand has helped limit global inventory draws despite ongoing supply disruptions. Expectations for global oil demand growth have been revised downward, reflecting fuel shortages, policy-driven demand restraint and lower refined product exports.

Most of the demand contraction has been concentrated in Asia, which is heavily reliant on crude imports from the Middle East. While timely data remains limited, particularly in the most affected countries, available indicators suggest that demand has fallen more sharply than previously anticipated. "As a result, global oil demand is now forecast to decline by an average of 1.1 million barrels per day in 2026, compared with an earlier expectation of 0.2 million barrels per day growth last month and 1.2 million barrels per day growth in February," EIA highlighted.

Demand is expected to recover in 2027 as prices ease and supply flows normalize, with growth projected at 2.5 million barrels per day to reach 105.3 million barrels per day.

In addition, oil demand is expected to decline further if the conflict persists, with the potential for additional downward pressure on prices should demand weaken more than currently anticipated. Several Asian countries are among the largest consumers of hydrocarbon gas liquids (HGL) used as petrochemical feedstocks, representing a potentially significant but less visible source of demand loss compared with transportation fuels.

As more data on global oil demand trends becomes available, forecasts and assumptions regarding global oil balances remain subject to revision.

Source: safety4sea.com