Oil market to return to surplus for first time since start of Iran war, IEA says

The global oil market is to return to a surplus for the first time since the start of the Iran war, despite supplies remaining tight, the International Energy Agency has said.

Global oil supplies have outpaced demand for the first time since the conflict broke out in late February. Crude inventories rose by 1.7 million barrels per day in October as exports from the Gulf recovered faster than worldwide demand, the Paris-based IEA said in its monthly market report on Friday.

Inventories climbed by 2.3 million bpd to 105.4 million bpd last month, raising output by an "extraordinary" 5.3 million bpd since August, the IEA said. Gulf oil exports, excluding Oman, hit 18.4 million bpd in October, which was 26 per cent below prewar levels as attacks on tankers transiting the Strait of Hormuz continued.

That narrowed the year-on-year output decline to 2.9 million bpd, compared with an average loss of eight million bpd loss from March to September, the agency added.

The higher export rates also prompted the IEA to "significantly" raise its expectations for global oil supply for the remainder of 2026, with fourth-quarter estimates now 3.3 million bpd higher. The oil market is "straightening out" and "showing tentative signs of rebalancing", the IEA said.

But the agency acknowledged that global oil demand continues to be weighed down by high prices and disruptions to exports of refined products and liquefied petroleum gas from the Gulf, which largely remain at about half of prewar levels.

The agency forecasts that global oil demand in 2026 will fall by 2.7 million bpd to 102.3 million bpd, a slight decrease from its October projections. Demand is to recover by two million bpd in 2027, it added.

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While LPG, ethane and naphtha will account for about 80 per cent of the expected increase next year as supply chains normalise, transport fuels will see a modest gain, "as high prices accelerate electrification and fuel efficiencies across the global car fleet", the IEA said.

The "severe tightness" in supply is still particularly pronounced for diesel, which has soared to record levels, especially in the US. Persistent attacks on Russian energy infrastructure continue to choke off the country’s diesel supplies to international markets, adding to losses from the Middle East, the IEA said.

"At the same time, Atlantic Basin refineries, particularly in the United States, are running hard to capture high margins, while improved crude availability in Asia and fresh Chinese product export quotas could support higher refinery throughput rates in the region," it said. "Notably, the accelerated release of IEA emergency diesel stocks over the coming months will provide a critical bridge across the supply gap until the global refinery system and product output recover."

The oil market is gradually recovering from the effects of the Iran war, which is now in its ninth month. While the US has signalled that it does not plan to carry out further military action against Tehran, a resolution to the conflict remains unclear.

Oil prices have been volatile throughout the war, but have markedly declined over the past weeks. At 5.02pm UAE time on Friday, Brent was up 0.35 per cent at $96.16 a barrel, while West Texas Intermediate shed 0.18 per cent to $88.58 a barrel.

The IEA's supply and demand balances suggest that the global oil market will return to a surplus in the fourth quarter of 2026, with a more substantial build in 2027. "As always, downside risks to the forecast persist, as attacks on shipping undermine maritime security, which is pivotal to a sustained recovery," the agency said.