A 9.4 million-barrel-per-day shortfall! IEA warns that further clashes between the US and Iran or their disruption could overturn next year’s expectations of oil oversupply

After the global oil market has just shown signs of breathing again following the worst supply crisis in history, it is once again facing a reversal risk.

In its monthly oil market report released Friday the 10th, the International Energy Agency (IEA) warned that clashes between the US and Iran broke out again on Tuesday and Wednesday, severely obscuring the market outlook and potentially overturning the agency’s forecast that next year’s oil market would turn to significant oversupply. The report said global oil supply rose by 4.1 million barrels per day in June due to the Strait of Hormuz reopening, but compared with pre-war levels, the gap is still as high as 9.4 million barrels per day. At the same time, the refined products market remains tight, with refinery profit margins climbing to a four-year high.

For benchmark crude prices, Brent crude futures were above $75.80 per barrel during the US stock market midday on Friday, slightly below pre-war levels. The IEA expects that if the volume of transit cargo through the Strait of Hormuz can recover gradually, the oil market could shift to supply oversupply before year-end, but this assumption is becoming increasingly fragile due to the latest round of conflict. Toril Bosoni, head of the IEA’s oil market, said the situation in the Middle East is “extremely uncertain, extremely unstable,” and any recovery will not arrive “quickly or linearly.”

A peace agreement is a “necessary condition” for oil-market normalization

The core warning in this IEA report directly targets renewed escalation in the US-Iran situation. The report said that after the US and Iran signed a memorandum of understanding (MoU) in mid-June, the Strait of Hormuz reopened, allowing large quantities of crude previously blocked within the Persian Gulf to sail out, pushing global supply in June back to 980,000 barrels per day. However, between July 7 and 8, the two sides reignited hostilities, with multiple ships attacked, and transit flows through the strait fell again to a trickle.

The IEA said explicitly that achieving a durable peace agreement is a “necessary condition” for the oil market to move toward normalization. Citing the latest conflict, the report said, “These firefight incidents highlight the risk that a durable peace agreement has not been reached.” The US said it would hold “technical talks” with Iran, and it remains committed to finding a solution. However, Trump previously announced at a NATO Ankara summit that the ceasefire deal with Iran “is over,” and he has characterized Iran’s attacks on merchant ships as “terrorist acts.”

Against this backdrop, costs for vessel war risk insurance have surged sharply. Reports say that vessel war risk insurance rates inside the Persian Gulf have risen to 3% of the vessel’s value, up from 2% last weekend, and some quotes have even reached as high as 5%.

Next year’s oversupply outlook is “uncertain”

Earlier, the IEA forecast that based on this year’s oil market supply tightening by 3.7 million barrels per day to an average of 988k barrels per day, next year’s oil market supply would rebound, expanding by 7.5 million barrels per day—at which point the market would swing from this year’s supply deficit of 860k barrels per day to an oversupply of 4.62 million barrels per day.

However, the above forecast depends heavily on one assumption: that transit volumes through the Strait of Hormuz continue to recover, enabling oil-producing countries to restart oil fields and allowing Middle East refineries to resume product shipments. The IEA acknowledged that in the current situation, fulfilling this assumption is full of variables.

On the demand side, the IEA expects global oil demand this year to fall by 1 million barrels per day year-on-year versus last year, marking the first annual decline since the 2020 COVID-19 pandemic. In Q2, the year-on-year decline in demand at one point reached as much as 4.8 million barrels per day, with Asia accounting for two-thirds of the peak decline.

Looking ahead to next year, the IEA forecasts demand will rebound and increase by 2 million barrels per day, but the two-year total expansion rate remains far below the historical average. The IEA also noted that a sharp drop in oil prices is stimulating consumption recovery, along with an improved economic outlook. Demand is expected to gradually repair from the May low, and the summer travel peak season could drive consumption up by about 800,000 barrels per day compared with the crisis period at the May peak.

Refining profits surge to a four-year high, and the refined-products market remains under pressure

Even though crude supply has rebounded quickly with the reopening of the Strait of Hormuz, the recovery in the refined products market has lagged clearly. This creates the market’s core contradiction: crude oil appears adequately supplied on the surface, but refined products remain persistently tight.

The IEA said this “split” has driven soaring cracking spreads and refinery profit margins in early July to a four-year high. While June’s global refinery runs rose by 1.5 million barrels per day quarter-on-quarter, they were still 6 million barrels per day lower year-on-year. Middle East export-oriented refineries have not restarted yet. Russian refineries are also being held back by the increased damage to their refining infrastructure from Ukraine, compressing processing volumes. Asian refineries are also operating at low utilization rates.

By specific product categories, the prior problem of a jet fuel shortage has eased somewhat, but diesel and gasoline supply is trending toward tightness, with gasoline cracking spreads rising sharply. The Atlantic basin diesel market has been especially noticeable in recent weeks. Limited Middle East production combined with a sharp drop in Russian exports has jointly intensified the tightening of supply. The IEA expects that global refinery runs will fall by 2.4 million barrels per day this year and rebound by 3.1 million barrels per day next year.

Inventories rise for the first time in four months, but the pre-war deficit remains large

On inventory levels, global oil inventories increased by 21 million barrels in June—the first rise in four months. Previously, inventories were reduced cumulatively by 360 million barrels from March through May. The rise in inventories is mainly due to a large increase in seaborne transportation volumes, which partially offsets the continued drawdown of onshore inventories.

By region, total OECD inventories continued to decline by 62 million barrels in June, of which about 44 million barrels came from the release of government reserves. The IEA said the planned release of 400 million barrels of emergency stocks has been completed at 69%, and the timing for the remaining release remains uncertain. China’s crude inventories fell by 41 million barrels in June, driving a decline of 37 million barrels in non-OECD crude inventories.

On oil price trends, North Sea crude spot prices plunged by 22 dollars per barrel month-on-month in June to around $68 per barrel, at one point dipping below pre-war levels, and the futures term-structure shifted to a forward premium structure (Contango). After the ceasefire agreement broke down on July 7 and 8, oil prices rebounded. At the time of the report’s writing, North Sea crude spot was around $77 per barrel. OPEC will release its own monthly oil market report on July 13, when the market will compare differences between the two major institutions’ forecasts.

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