The IEA forecasts world oil supply will fall by 3.9 million barrels per day (bpd) in 2026, assuming flows through the Strait of Hormuz gradually resume from June. The earlier forecast was a 1.5 million bpd fall, and Hormuz is a route for almost 20% of global energy supply.
The IEA now expects total world oil supply to be 1.78 million bpd below demand in 2026. In the previous report, it had supply 0.41 million bpd above demand.
World oil demand is projected to fall by 420,000 bpd in 2026 due to the Iran war, compared with an earlier 80,000 bpd drop. The total global supply loss linked to the Hormuz closure is put at 12.8 million bpd since February.
Global oil refinery runs are forecast to fall by 1.6 million bpd across 2026 due to attacks, lower crude availability, and export restrictions. The IEA reports global oil inventories are being depleted at a record pace, with 246 million barrels drawn down in March-April.
After the report, WTI oil showed no visible price reaction and was down almost 1% near $97.50. WTI is a US crude benchmark traded in dollars, with prices influenced by supply and demand, geopolitics, OPEC decisions, and inventory data from API and EIA.
The new IEA report signals a massive supply deficit of 1.78 million barrels per day for 2026, a dramatic reversal from the previously expected surplus. This is being driven by a huge projected supply drop of 3.9 million barrels per day and record inventory draws of 246 million barrels in just the last two months. Despite these incredibly tight supply figures, the price of WTI crude fell, showing that the market is currently more concerned about demand destruction from a potential recession.
We believe the market’s negative reaction is being influenced by recent weak economic data that the IEA may not have fully factored in. For instance, last week’s U.S. non-farm payrolls report for April 2026 showed an unexpected decline of 50,000 jobs, hinting that high energy prices are beginning to slow the economy. This fear of a slowdown is temporarily outweighing the stark reality of the physical supply shortage.
For derivative traders, this creates a major divergence between physical market tightness and paper market sentiment, which means volatility is likely to rise. The CBOE Crude Oil Volatility Index, or OVX, has already climbed to over 60, its highest level this year, suggesting traders are pricing in very large price swings. We should consider strategies that profit from this volatility, such as buying straddles, which bet on a big move in either direction.
This situation is reminiscent of what we saw back in mid-2008, when oil prices plummeted from nearly $150 a barrel even as supply fundamentals appeared tight. The overwhelming force of the global financial crisis crushed demand so severely that it overshadowed all other factors. Traders today may be positioning for a similar outcome, where the war-induced price spike ultimately triggers a recession that sends prices lower.
In the coming weeks, we should closely monitor the structure of the WTI futures curve for clues. The front-month contracts are trading at a significant premium to later-dated ones—a condition known as backwardation—reflecting the immediate supply crunch. If this spread starts to narrow, it will be a clear signal that fears of future demand destruction are beginning to overpower concerns about today’s lack of supply.
