IEA expects significant 2027 oil surplus after Hormuz recovery

[LONDON] 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 (IEA) said in its monthly oil market report on Wednesday (Jun 17).

The US 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 14 million barrels a day of Middle East oil output, according to the IEA.

“If the deal holds, exports and production from the Gulf should (experience) 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.

The oil market will then fall into a significant supply overhang next year, the IEA said in its first look at 2027, as oil supply is set to surge by eight million barrels a day while demand rises by just two million barrels a day.

Middle East supply already rising

Flows through the strait were already rising by early June because of a pickup in ship-to-ship transfers in the Gulf of Oman, the IEA said.

It added that this helped to boost total Middle East flows to around 12 million barrels a day in early June, from a May low of 9.6 million barrels a day.

However, political and operational constraints, including prolonged demining and unresolved transit arrangements, leave downside risks to the Middle East recovery outlook, it noted.

Overall, the agency forecasts oil supply to fall by 3.9 million barrels a day in 2026, as production losses in the Middle East outpace rising output from the Americas.

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Russian crude oil and refined fuel exports were stable at around 7.4 million barrels a day 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.

Demand destruction spreads

According to the IEA, global oil demand will fall by 1.1 million barrels a day in 2026, after a five-million-barrel-a-day April-to-June drop.

Demand destruction has spread beyond the areas that were initially most impacted by the Iran war, it added, with deliveries of all major fuels and especially gasoil “showing signs of strain across almost all regions”.

Demand will then recover swiftly and grow in 2027, as falling oil prices and an improving economic outlook drive the rebound, the agency noted.

In its own monthly report, rival forecaster Opec lowered its forecast for oil demand growth in 2026 to 970,000 barrels a day.

Large surplus looms in 2027

The IEA forecasts imply that supply will come in around 920,000 barrels a day below total demand in 2026, according to Reuters’ calculations, narrowing from a 1.78 million barrel a day deficit in May’s report.

Its 2027 forecasts imply that supply will outweigh demand by 5.05 million barrels a day, as demand growth is overshadowed by supply ramping up as Middle East barrels return.

It added that the global oil market tipping into a large 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”.

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 agency noted.

Inventories have fallen at a rate of 3.8 million barrels a day since the start of the war on Feb 28, with stock draws in May alone at around 4.6 million barrels a day, based on preliminary IEA data. REUTERS