The oil market will move into a significant supply surplus in 2027 after recovering from the closure of the Strait of Hormuz, the International Energy Agency said in its monthly oil market report on Wednesday.
The US has announced an interim agreement to end the Iran war, which includes Iran reopening the strait and the US lifting its naval blockade of Iran, potentially bringing an end to the largest oil supply disruption in history.
The war is estimated to have blocked more than 14mn barrels per day (bpd) of Middle East oil output according to the IEA.
The oil market will then fall into a significant supply surplus next year, the IEA said in its first look at 2027, as supply is set to surge by 8mn bpd while demand rises by 2mn bpd.
A large supply surplus in 2027 could "provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in response to the crisis," the IEA said.
Flows through the strait were already rising by early June because of a pick-up in ship-to-ship transfers in the Gulf of Oman, the IEA said, helping to boost total Middle East flows to around 12mn bpd from a May low of 9.6mn bpd.
"If the deal holds, exports and production from the Gulf should see a gradual recovery — not least because Iranian oil exports can fully resume once the US blockade is lifted," the agency, which advises industrialised countries, said.
However, political and operational constraints, including prolonged demining and unresolved transit arrangements, leave downside risks to the Middle East recovery outlook, the IEA said.
Overall, the IEA forecasts oil supply to fall by 3.9mn bpd in 2026, as production losses in the Middle East outpace rising output from the Americas.
Russian crude oil and refined fuel exports were stable at around 7.4mn bpd in May despite continued Ukrainian drone attacks on refineries, the IEA said, though the attacks forced Russia to prioritise fuel supply to the domestic market and to maximise crude oil exports.
Global oil demand will fall by 1.1mn bpd this year according to the IEA, after a 5mn bpd April-June drop.
Demand destruction has spread beyond the areas that were initially most impacted by the Iran war, the IEA said, with deliveries of all major fuels and especially gasoil "showing signs of strain across almost all regions".
Demand will then recover swiftly and grow next year, as falling oil prices and an improving economic outlook drive the rebound, the IEA said.
In its own monthly report, rival forecaster Opec lowered its forecast for oil demand growth in 2026 to 970,000 barrels per day.
The IEA forecasts imply that supply will come in around 920,000 bpd below total demand in 2026, according to Reuters' calculations, narrowing from a 1.78mn bpd deficit in the previous month's report.
The IEA's 2027 forecasts imply that supply will outweigh demand by 5.05mn bpd next year, as demand growth is overshadowed by supply ramping up as Middle East barrels return.
That is larger than the 2026 surplus that IEA had previously forecast, which in its November 2025 report it pinned at 4.09mn bpd.
However, oil inventories could plunge further to historic lows before the market balance is able to shift to a surplus towards the end of this year, the IEA said. Inventories have fallen at a rate of 3.8mnbpd since the start of the war on February 28, with stock draws in May alone at around 4.6mn bpd, according to preliminary IEA data.
