IEA warns global oil refining system ‘stretched to the limit' as Iran, Ukraine wars tighten market

• Global oil supply is expected to decline by 5.7 million barrels per day in 2026, a 6% drop from 2025 levels, worse than the previously forecast 4% decline from August
• Oil demand forecast was cut to a decline of 2.5 million bpd this year, significantly higher than the 1.6 million bpd drop predicted in August
• Oil prices traded above $100 per barrel for the first time since mid-May, with Brent at $104.44 and WTI at $99.86, as conflicts disrupt flows through key choke points like the Strait of Hormuz and Bab el-Mandeb

IEA Warns of Strained Global Oil Refining System Amid Geopolitical Tensions

The International Energy Agency (IEA) issued a stark warning Friday that ongoing conflicts in Iran and Ukraine are pushing the global oil refining system to critical capacity limits, prompting significant downward revisions to supply and demand forecasts.

Key Projections

The IEA slashed its 2026 global oil supply forecast by 6% compared to 2025 levels, now expecting a decline of 5.7 million barrels per day (bpd)—worse than the 4% drop forecast in August. Global oil demand is projected to fall 2.5 million bpd in 2026, substantially higher than the previously estimated 1.6 million bpd decline.

Market Factors

The agency attributed the deteriorating outlook to delayed recovery in Middle East oil flows, with full restoration deferred until next year. Diplomatic impasse between the U.S. and Iran continues to prolong tensions, while shipping disruptions persist in critical chokepoints including the Strait of Hormuz and the Red Sea's Bab el-Mandeb strait.

The IEA emphasized that shrinking inventory buffers have been crucial for market balancing but warned that with refineries operating at maximum capacity, the system's resilience is increasingly fragile. The agency stressed urgent need for conflict resolution in both the Middle East and the ongoing Russia-Ukraine war to prevent further market tightening and demand destruction.

Price Action

Oil prices traded above $100 per barrel for the first time since mid-May, though both benchmarks declined Friday. Brent crude futures fell 3% to $104.44 per barrel, while WTI futures dropped 2.6% to $99.86.

Recent escalations include U.S.-Iran tanker attacks near the Strait of Hormuz and intensified fighting between Saudi Arabia and Iran-backed Houthis in Yemen.