IEA warns of plunging oil stockpiles as Gulf war cuts supply, demand slumps

Global oil markets are reeling as the International Energy Agency (IEA) warns that world demand will contract by 420,000 barrels per day this year, while supply losses from the Gulf war and the closure of the Strait of Hormuz have already drained nearly 13 million barrels per day from output. 

The agency’s May Oil Market Report highlights plunging inventories, volatile prices, and mounting risks of smuggling as Asia’s refiners slash imports.

The agency warned that the combination of collapsing demand, disrupted supply chains, and volatile prices is reshaping the energy landscape in ways not seen since the 1970s oil shocks.

Demand outlook darkens

According to the IEA, world oil demand is forecast to contract by 420,000 barrels per day (bpd) in 2026, bringing consumption down to 104 million bpd. 

The steepest decline is expected in the second quarter, when demand is projected to fall by 2.45 million bpd compared with the same period last year.

OECD countries will account for 930,000 bpd of the drop, while non‑OECD nations shed 1.5 million bpd. 

The agency highlighted petrochemicals and aviation as the hardest‑hit sectors, with higher prices and weaker economic conditions curbing consumption.

The IEA noted that this marks the first annual contraction in global oil demand since the pandemic year of 2020. “The war in the Gulf has fundamentally altered trade flows and consumer behavior,” the report said. 

Supply shock deepens

On the supply side, the IEA reported that global oil output fell by 1.8 million bpd in April to 95.1 million bpd, bringing cumulative losses since February to 12.8 million bpd. 

Output from Gulf producers is now 14.4 million bpd below pre‑war levels due to restrictions at Hormuz.

The agency projects global supply to average 102.2 million bpd in 2026, down 3.9 million bpd from pre‑war forecasts.

Relief has come from the Atlantic Basin, where exports from the United States, Brazil, Canada, Kazakhstan, and Venezuela have risen by 3.5 million bpd since February. 

But the IEA cautioned that these increases are insufficient to offset the massive shortfall from the Gulf.

“The loss of Hormuz barrels has created a structural deficit that alternative suppliers cannot fully bridge,” the report said.

Refining and inventories under pressure

Refinery crude throughputs are forecast to plunge by 4.5 million bpd in the second quarter, to 78.7 million bpd.

Margins remain high, supported by record middle distillate cracks, but refiners are struggling to secure feedstock. 

Global inventories fell by 129 million barrels in March and 117 million barrels in April, with OECD stocks down 146 million barrels.

On‑land stocks dropped by 170 million barrels in April, while oil on water rebounded by 53 million barrels.

The IEA warned that inventories are now at critically low levels. “Stock draws of this magnitude are unsustainable,” the agency said. “Without a resolution to the Gulf crisis, the market faces the risk of severe shortages later in the year.”

Price volatility returns

Oil prices have swung wildly in recent weeks.

North Sea Dated crude traded in a $50 per barrel range in April, averaging $120.36 per barrel.

Prices spiked to $144 per bbl before plunging below $100 per bbl, then rebounded to $110 per bbl in May. 

Time spreads in WTI and Brent futures ended April at around $5 per bbl, while Dated’s premium to ICE Brent narrowed from $35 per bbl in mid‑April to just $3 per bbl in early May.

Regional impacts

Asia has borne the brunt of the disruption.

China’s seaborne crude imports fell by 3.6 million bpd from February to April.

Japan cut 1.9 million bpd, Korea 1 million bpd, and India 760,000 bpd.

The IEA noted that Asian refiners are scrambling to secure alternative supplies, often paying steep premiums for Atlantic Basin cargoes.

In Europe, refiners have increased runs to capture high margins, but the region remains vulnerable to supply shocks.

The United States has emerged as a key swing supplier, with exports rising sharply, but domestic inventories are tightening.

Outlook and risks

Looking ahead, the IEA expects demand to remain weak through the rest of 2026, with only a modest recovery in 2027 if prices stabilize and the Gulf crisis eases.

The agency warned that smuggling and illicit trade are likely to increase as importers seek cheaper barrels outside official channels. “The risk of parallel markets is rising,” the report said. 

“Governments must remain vigilant to prevent distortions that could undermine energy security.”

The IEA also highlighted the potential for policy responses, including strategic stock releases and demand‑side measures. 

“Energy conservation campaigns, fuel switching, and efficiency improvements will be critical to managing the crisis,” the agency noted.

The May Oil Market Report paints a grim picture of the global energy landscape.

With demand contracting, supply disrupted, inventories plunging, and prices volatile, the world faces a precarious balance. 

The IEA’s warning is clear: without a resolution to the Gulf war and the reopening of Hormuz, the oil market will remain under severe strain, with risks of shortages, smuggling, and economic fallout spreading across the globe.