The global oil market could swing from one of the worst supply shocks in decades to a substantial surplus next year as Gulf crude production recovers following the US-Iran peace agreement, the International Energy Agency (IEA) has warned.
In its latest monthly oil market report, the Paris-based agency said the oil supply disruption triggered by the Iran conflict has not only curtailed production but also weakened global demand, setting the stage for a potentially dramatic market reversal in 2027.
The IEA now forecasts global oil supply to rise by around 8 million barrels per day (bpd) next year, while demand is expected to increase by only about 2 million bpd. The imbalance could leave the market facing a surplus of more than 5 million bpd, one of the largest projected overhangs in recent years.
The forecast assumes the successful implementation of the interim peace agreement involving Iran, including the reopening of the Strait of Hormuz and the lifting of the US naval blockade that has severely constrained oil exports from the region.
The development marks a remarkable turnaround from the situation that prevailed only weeks ago, when concerns over prolonged disruptions to Gulf energy supplies pushed oil prices above $110 a barrel and fuelled fears of a global economic slowdown.
Instead, the IEA now believes the market is moving towards a period of abundant supply.
“The oil market could transition rapidly from scarcity to surplus if Middle East production returns as expected,” analysts said, noting that the restoration of Gulf exports would release millions of barrels back into the global market at a time when demand growth is slowing.
The agency sharply downgraded its outlook for oil consumption in 2026, cutting projected demand growth by 700,000 bpd from last month’s forecast. Global demand is now expected to grow by only 1.1 million bpd this year after the conflict and supply disruptions weighed heavily on economic activity and fuel consumption.
According to the report, oil deliveries plunged by nearly 5 million bpd during the second quarter as geopolitical tensions disrupted trade flows, increased shipping costs and dampened industrial activity across several major economies.
The weaker demand outlook reflects a combination of factors, including slower global growth, reduced manufacturing activity and the lingering impact of elevated energy prices during the height of the crisis.
At the same time, however, the supply picture is expected to improve dramatically.
The lifting of restrictions on Gulf exports could restore more than 14 million bpd of Middle Eastern production that had been constrained by the conflict and related shipping disruptions. Early signs of recovery are already emerging. The IEA noted that oil flows through the Strait of Hormuz climbed to around 12 million bpd in early June as shipping activity gradually resumed.
For Gulf producers, particularly Saudi Arabia, the UAE, Kuwait and Iraq, the reopening of export routes offers the prospect of recovering lost market share and boosting production volumes after months of disruption.
Yet the return of these barrels could also create fresh challenges.
Analysts warn that a large supply overhang could place sustained downward pressure on oil prices, complicating fiscal planning for oil-exporting nations and potentially forcing Opec+ producers to reconsider output strategies.
The IEA estimates that global oil supply will still decline by about 3.9 million bpd in 2026 because of production losses in the Middle East, despite increased output from North and South America. However, those losses are expected to be more than offset next year as Gulf production rebounds.
For oil-importing countries such as India, China and many European economies, the prospect of lower oil prices would provide welcome relief by reducing inflationary pressures and improving trade balances.
The report also suggests that lower prices could stimulate a modest recovery in demand during 2027, although not enough to absorb the expected surge in supply.
The resulting surplus could enable countries to rebuild strategic petroleum reserves that were drawn down during the crisis while giving refiners and traders greater flexibility in inventory management.
Despite the optimistic outlook, the IEA cautioned that significant uncertainties remain. The pace of recovery will depend on the durability of the peace agreement, the reopening of key shipping lanes and the successful completion of demining and security operations in the Strait of Hormuz.
Any renewed geopolitical tensions or delays in restoring normal export operations could alter the supply outlook substantially.
Nevertheless, the agency’s latest projections underscore how quickly the global oil market is changing. What began as a severe supply crisis is increasingly evolving into concerns over excess supply, raising the prospect that the dominant energy market story of 2027 may not be scarcity, but abundance.
For Gulf producers, the challenge may soon shift from restoring output to managing a new era of oversupply and softer prices in an increasingly competitive global market.
