The global oil market could swing into a substantial surplus next year as production recovers sharply following the US-Iran peace agreement and the gradual reopening of Gulf energy routes, according to the latest outlook from the International Energy Agency (IEA).
The agency's first projections for 2027 show global oil supply surging by around 8 million barrels per day (mb/d) to 110.3 mb/d, far outpacing an expected increase in demand of 2 mb/d to 105.3 mb/d. The imbalance could leave the market facing an excess of roughly 5 mb/d, creating opportunities to rebuild depleted inventories and replenish strategic reserves.
"The market balance is expected to shift to surplus towards the end of the year," the IEA said, warning that a significant supply overhang is emerging for 2027.
The outlook comes as oil prices have tumbled following the interim agreement between the United States and Iran, which is expected to pave the way for the reopening of the Strait of Hormuz and the lifting of restrictions on Iranian oil exports.
Brent crude prices have fallen by more than $40 a barrel from peaks reached earlier this year, dropping to around $78 per barrel amid expectations of increased Middle East supply and weakening demand growth.
The agency said global oil demand is now expected to contract by 1.1 mb/d in 2026, a downgrade of 700,000 barrels per day from its previous forecast. Demand was particularly weak during the second quarter, when deliveries plunged by 5 mb/d year-on-year as higher fuel prices and disruptions to product availability weighed on consumption.
While demand is forecast to recover in 2027, supported by lower oil prices, improving economic conditions and the normalisation of global trade flows, the rebound is expected to remain modest compared with the projected increase in supply.
On the supply side, global oil production is forecast to average 102.4 mb/d in 2026, down 3.9 mb/d from this year as the effects of the Gulf conflict continue to be felt. However, output is expected to rebound strongly in 2027 as Iranian exports return, shipping through Hormuz normalises and production from both OPEC+ and non-OPEC producers increases.
The IEA cautioned that the recovery in Gulf supplies may take time. Although exports through the Strait of Hormuz have already risen from a May low of 9.6 mb/d to around 12 mb/d, mines still need to be cleared from shipping lanes and logistical bottlenecks remain.
Global refinery activity also reflects the impact of the conflict. Crude processing rates are forecast to fall by 2 mb/d in 2026 to 82 mb/d, with particularly sharp declines across China, the Middle East, Eurasia and other Asian markets. Refinery runs are expected to recover by 3.1 mb/d in 2027 as crude supplies normalise.
Despite weaker demand, oil inventories continue to decline at a rapid pace. Global observed stocks fell by 143 million barrels in May alone, equivalent to 4.6 mb/d, while OECD government inventories dropped to their lowest level since December 1990 following accelerated emergency stock releases.
The IEA said the continued drawdown in inventories reflects the severity of supply disruptions during the conflict, but noted that the expected surplus in 2027 could provide a much-needed opportunity for countries to rebuild stockpiles and strengthen energy security following one of the most disruptive periods for global oil markets in decades. -TradeArabia News Service
