US-Iran escalation could upend 2027 oil surplus: IEA

A fresh flare-up in US-Iran hostilities could derail the International Energy Agency's forecast of a major oil market surplus next year, the agency warned Friday, even as global supply jumped in June following the reopening of the Strait of Hormuz.

The Strait's reopening in June, part of a ceasefire the US and Iran signed on June 18 after a war that began in late February, had eased the largest oil supply disruption in the market's history.

Global supply rose 4.1 million barrels per day in June but remained 9.4 million bpd below pre-war levels. That recovery is now in question: renewed fighting broke out on July 7-8 after President Trump declared the ceasefire over and ordered new strikes, following Iranian attacks on commercial vessels attempting to transit Hormuz earlier in the week.

"An escalation in hostilities on 7-8 July, however, clouds the outlook and could upend the forecast that sees the market flipping to a surplus next year," the IEA said, calling a lasting peace deal a "must" for markets to normalise.

On condition that producers are able to resume field production activities and refiners revert to normal supplies, the IEA forecast for 2027 reveals a situation where the balance of the market will see supply surpassing demand by 4.62 million barrels per day, compared with an 860,000 barrel per day deficit this year.

Supply levels are expected to increase by 7.5 million barrels per day next year following a contraction of 3.7 million barrels per day last year, depending wholly on the ability of the Hormuz passage to improve its flow. World oil demand is forecasted to drop by 1 million barrels per day this year before increasing by 2 million barrels per day in 2027.

While crude exports have recovered, the refining activities and product exports have been slow in catching up with this pace, thus creating a tighter market for refined products despite crude production being more abundant. This has caused cracks and refining margins to rise to four-year peaks as of early July, according to the IEA, as fears have moved from shortages of jet fuel to gasoline and diesel.

Diesel markets in the Atlantic basin have tightened quickly, as limited Middle Eastern production combined with reduced Russian exports due to attacks on refining facilities in Ukraine.