World oil demand is on track to record its first annual decline since 2020, when the pandemic brought the planet to a standstill for months. The news comes from the International Energy Agency (IEA), which has just confirmed forecasts it first made months ago. The war in Iran has hit the oil sector hard, in both production and exports, since the Strait of Hormuz is part of the key shipping route for crude.

For the second time in six years, the world has bought significantly less oil — and once again, not for the reasons anyone had hoped. Had renewable energy development reached more satisfying levels, the story might look very different. Instead, oil remains the preferred thermometer of the global economy, so the hope now rests on a recovery. The IEA itself says it is confident of a rebound, but it is well aware of the volatility in the Middle East.

World oil demand set for first annual drop since 2020

The IEA’s latest oil market report — a document every industrialized country waits for with some apprehension — highlights fears already present in the international community. Back in the spring, the agency had forecast that the Middle East conflict and the resulting energy crisis would push annual crude demand into its steepest decline since the pandemic era. That is exactly what is set to happen, with a drop of 1 million barrels per day (b/d) year-over-year in 2026 — the first annual decline since 2020.

The war between the United States and Iran has “destroyed consumption,” hitting prices, volumes and availability alike, but that same tight causal link is also a source of hope. Last month, during the ceasefire, oil markets showed clear signs of recovery. In June, global supply rose by 4.1 million barrels per day, even though it remained 9.4 million b/d below pre-war levels — confirming that stability in the Middle East is immediately reflected in the oil market.

It is no coincidence that the IEA sees, at least in the current situation, a slow improvement that could restore a surplus by the end of the year. That outcome, however, depends on the geopolitical situation continuing to improve until a lasting peace is reached between Washington and Tehran. The renewed exchanges of fire clearly put that scenario at risk.

A recovery is possible by year-end — but it hinges on Iran and the United States

With the ceasefire between Iran and the United States and the gradual reopening of the Strait of Hormuz, tanker traffic could resume, and Middle Eastern oil fields and refineries could restart. Based on those assumptions, the IEA expects global oil supply to climb to 7.5 million b/d next year, following a contraction of 3.7 million b/d this year. The 860,000 b/d deficit expected this year should then be erased in 2027, when supply could register a surplus of 4.62 million b/d.

For that to happen, though, a lasting peace deal for Iran will be necessary — without one, the IEA does not foresee a normalization of oil markets. The crisis’s renewed escalation — the ceasefire now effectively abandoned, even as “the talks continue,” in President Trump’s words — puts that whole projection at risk. It’s true that “significant growth from other producers” and “demand levels lower than expected before the war” will help the recovery, but they cannot offset further blockages of the Strait of Hormuz or fresh energy shocks.

This is a problem of historic proportions, because entire sectors — heavy transport, shipping and petrochemicals chief among them — still depend heavily on oil. Efforts toward the energy transition remain far from providing a safety net against oil shocks of this kind, which are difficult to contain even with the broadest possible diversification of supply (something Italy, for instance, has managed relatively well). For now, the outcome hinges almost entirely on Iran and the United States, with all the unpredictability that entails.

Editor’s note

This article was originally published in Italian on money.it by Ilena D’Errico on July 10, 2026 as «Secondo l’AIE, la domanda mondiale di petrolio è destinata a registrare il primo calo annuale dal 2020». It has been translated and adapted for an international audience by the Money.it International desk.