US-Iran Peace May Be Achieved, but the World Won't Recover Overnight
The global oil supply shock triggered by the Iran conflict has massively eroded crude demand, but the International Energy Agency (IEA) warns that a long-term peace resolution could spark a production surge and lead to an excessive oil glut next year.
In its latest monthly market report released on Wednesday (17/6/2026), the IEA slashed its 2026 demand outlook to 1.1 million barrels per day year-over-year. This marks a drop of 700,000 barrels per day from last month’s forecast, after shipment volumes plunged by as much as 5 million barrels per day in the second quarter due to the war’s impact.
Meanwhile, total global oil supply fell to 94.5 million barrels per day in May, a monthly decline of around 600,000 barrels per day. This dragged production capacity down to 13.6 million barrels per day, well below pre-conflict levels in the Middle East.
IEA projects total global supply will drop by 3.9 million barrels per day year-over-year in 2026 to 102.4 million barrels per day, before rebounding strongly to 110.3 million barrels per day next year. The current demand slump reflects a combination of high fuel prices and shortages of refined oil products across various nations.
However, global supply is expected to surge by roughly 8 million barrels per day to around 110 million barrels per day in 2027. This increase will vastly outstrip a moderate demand recovery of just 2 million barrels per day, bringing demand to 105.3 million barrels per day.
“Our first look at the 2027 market balance points to the emergence of a very significant oil supply surplus next year,” the IEA stated in its official report regarding the potential crude glut in international markets.
The report was released as global investors scrutinise the impact of a peace memorandum between the US and Iran and plans to reopen the Strait of Hormuz on the energy sector. Global crude prices have already tumbled to a three-month low ahead of the formal signing ceremony scheduled in Geneva on Friday.
Market sentiment was also influenced by the passage of three Iranian tankers carrying nearly 5 million barrels of crude after being allowed through a US naval blockade. In futures trading, Brent crude weakened 0.7% to US$78.44 per barrel, while US West Texas Intermediate (WTI) for July delivery fell 1.1% to US$75.18 per barrel.
“If this deal holds, export and production volumes from the Gulf region will recover gradually—particularly as Iranian exports can resume fully once the US blockade is lifted,” the IEA added in its market projection.
Although shipping volumes through the Strait of Hormuz have rebounded from a May low of 9.6 million barrels per day to around 12 million barrels per day, aided by ship-to-ship transfers, the IEA cautioned that a full recovery will not happen instantly. Authorities stressed that clearing naval mines from major shipping lanes and restoring global supply chains will take months.
The IEA also highlighted the critical depletion of global oil inventories during the conflict. World stocks shrank by a dramatic 143 million barrels in May, following a 74 million barrel decline in April, meaning reserves have evaporated at a rate of roughly 3.8 million barrels per day since the war erupted on 28 February.
“Despite significant declines in crude and refined product demand, the buffer in the system continues to erode at a record pace. Further drawdowns in the coming months could push global stocks to historic lows before the market balance shifts towards surplus later in the year,” the IEA explained.
PVM Oil Associates analyst Tamas Varga noted that despite the deep depletion of reserves, current oil prices are already very close to their levels at the end of February. “Certainty regarding the reopening of the Strait of Hormuz will directly affect global oil balance projections, with the key question now being how much oil flow will return to the international market,” he concluded.