US-Iran escalation threatens oil supply recovery, warns IEA

The International Energy Agency has cautioned that the resumption of fighting between the United States and Iran poses a significant threat to global energy market stability. The UN agency flagged the risk that continued hostilities could undermine hopes for a swift recovery in oil supply and pricing, particularly as the conflict continues to disrupt production and exports across the Middle East region.

The latest round of military escalation this week was triggered by competing interpretations of provisions in the June memorandum of understanding governing passage through the Strait of Hormuz, a critical chokepoint for global energy trade. Before the broader conflict erupted in April, the waterway facilitated approximately one-fifth of the world's oil and liquefied natural gas exports. The effective closure of Hormuz has resulted in the loss of as much as 14 million barrels per day of crude oil flows.

The IEA reported that world oil demand is on track to decline this year for the first time since 2020, driven by the ongoing conflict and its disruption to supply chains. A recovery had begun following the June memorandum of understanding, with global oil supply rising by 4.1 million barrels per day in June after the strait reopened. However, supply remained 9.4 million barrels per day below pre-war levels. The agency had projected a 4.62 million barrel per day surplus in global supply by 2027 based on assumptions of full strait operation, but renewed fighting has halted shipping once again.

Despite the disruption, oil prices remained relatively stable in early Friday trading, with Brent crude at $76.37 per barrel, though up more than $4 from a week earlier. Analysts attributed the price stability to market confidence that the situation would eventually stabilize. However, tightening inventories suggest further upward pressure on prices in coming weeks.

Reports indicated that a lull in attacks on Thursday and Friday reflected ongoing diplomatic efforts to revive the ceasefire. Sources told media outlets that Pakistan and Qatar were working to bring the US and Iran back to negotiations, though US military forces remained prepared to resume strikes if necessary.