U.S.-Iran Escalation to Delay Oil Flow Recovery Into Next Year, IEA Says

The energy watchdog further cut its outlook for global oil demand, now expecting consumption to fall by 2.5 million barrels a day in 2026

A recovery in Middle East oil flows is now expected to stretch into next year as escalating attacks on Gulf shipping and Houthi threats in the Red Sea keep key energy arteries under strain, the International Energy Agency said.

Higher fuel prices, as well as steep losses of petrochemical feedstocks and refined product supplies would continue to weigh on consumption, the IEA said.

The energy watchdog—a group of Western nations and their allies—further cut its outlook for global oil demand, now expecting consumption to fall by 2.5 million barrels a day in 2026 to 102.4 million barrels a day, compared with its previous forecast

That divergence underscores where the market is tightest. Refiners are earning high returns as fuel prices outpace crude costs, giving them a strong incentive to maximize production even as the broader oil system remains constrained.

At the same time, inventories that have helped cushion the shock are being depleted at unprecedented rates. Global observed oil stocks have fallen by about 2.8 million barrels a day on average since the start of the war, according to the IEA. In August alone, inventories declined by 3.1 million barrels a day.

Global oil supply fell by 1.6 million barrels a day last month. For the year as a whole, the IEA now expects global supply to decline by 5.7 million barrels a day, deeper than its previous forecast for a drop of 4.3 million barrels a day.

The oil market entered the crisis with a surplus of more than 1 million barrels a day. When shipments through the Strait of Hormuz were disrupted, Saudi Arabia and the United Arab Emirates quickly rerouted oil through alternative export routes, helping to limit the initial hit to global supply.

Exports through the alternative ports of Yanbu and Fujairah rose to 7.8 million barrels a day in June from 4.1 million barrels a day in February, before attacks by the Yemen-based Houthi militants in the Red Sea pushed flows back to 5.5 million barrels a day in August, the IEA said.

The additional volumes shipped through those routes have offset more than 500 million barrels of lost flows through the Strait of Hormuz, or about 2.8 million barrels a day. But more than six months into the conflict, the workarounds are coming under pressure. Gulf oil production and exports remain severely restricted, while flows through the Strait of Hormuz averaged just 7.6 million barrels a day in August—13.1 million barrels a day below prewar levels.

The waterway was a vital conduit for global energy supplies before the war, carrying about one-fifth of the world’s oil and liquefied natural gas to overseas markets. The scale of current traffic is difficult to determine, with some tankers sailing through the strait with their tracking systems turned off.

The IEA’s outlook improves sharply in 2027. Global oil demand is expected to return to growth, rising by 2.6 million barrels a day, while supply is expected to surge by 8 million barrels a day. OPEC and its allies are expected to account for 5.5 million barrels a day of that increase, with producers outside the group contributing another 2.5 million barrels a day.

The report came after oil prices soared above $100 a barrel this week for the first time since July, as escalating U.S.-Iran clashes and renewed strikes by the Iran-allied Houthis on Saudi Arabia deepened fears of prolonged supply disruptions.

A prolonged conflict has also raised the risk of a fresh wave of energy-driven inflation, as higher fuel costs filter through to households, companies and the wider economy. Brent crude, the global oil benchmark, was trading above $105 a barrel in early European trading Friday, while West Texas Intermediate hovered around $101 a barrel.

Write to Giulia Petroni at giulia.petroni@wsj.com