The International Energy Agency (IEA) has confirmed that a recovery in global oil demand is underway after hitting a low of 97.9 million barrels per day (mb/d) in May — a year-on-year decline of 5.3 mb/d. By October, the agency projects demand will climb more than 8 mb/d above that May trough, surpassing 2025 levels for the first time since February. However, the IEA has warned that lasting peace in the Gulf is a prerequisite for full normalisation in crude markets.

Demand Trajectory and Seasonal Boost

The IEA's latest Oil Market Report attributes the demand uptick partly to the peak summer travel season, which is expected to receive an additional lift from the release of pent-up demand. Despite this recovery, the agency projects global oil demand to decline by 1 mb/d this year overall, before rebounding by 2 mb/d in 2027. The near-term recovery, while real, does not erase the structural demand shortfall recorded earlier in the year.

Gulf Tensions and the Surplus Risk

The global oil market balance is forecast to swing back to surplus towards the end of the year — but that outlook rests critically on the assumption that tanker flows through the Strait of Hormuz gradually recover, enabling producers to restart fields and refiners across the Middle East to resume product shipments. The IEA flagged that this assumption remains fragile. 'Renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement, which is a must for the normalisation in oil markets,' the agency stated.

Notably, a ceasefire agreement was breached on 7-8 July, causing crude prices to spike. North Sea Dated crude, which had plunged by $22 per barrel month-on-month to around $68/bbl in June — erasing all wartime gains — rose to around $77/bbl at the time of the IEA's writing, with prompt time spreads reverting to contango before the breach.

Inventory Movements and Stock Draws

Global observed oil inventories rose for the first time in four months in June, climbing by 21 mb, as sharply higher oil-on-water volumes more than offset continued draws in onshore tanks. Following a decline of 73 mb in May, total OECD stocks fell by a further 62 mb in June, of which an estimated 44 mb came from government stock releases. Non-OECD crude stocks eased by 37 mb in June, led by a 41 mb draw in China.

Refined Products Lagging Crude Recovery

While a wave of crude oil entered the market, refinery activity and product supplies have been significantly slower to respond. Gulf exports of refined products and LPG in June remained less than half their pre-war levels, compared with crude flows that reached nearly three-quarters of their February rates. 'Loadings from key export refineries in the Gulf have yet to resume, suggesting operations remain constrained,' the IEA noted.

Adding to the tightness in product markets, intensifying Ukrainian attacks on Russian refineries and export infrastructure have further squeezed product supplies, with both exports and domestic fuel deliveries in Russia significantly impacted, according to the report.

What to Watch

The trajectory of Gulf peace negotiations and the pace of tanker flow recovery through the Strait will be the decisive variables for oil market direction in the second half of the year. A sustained ceasefire that enables Gulf refineries to resume full operations could tip the market firmly into surplus; a fresh escalation risks reversing the demand-recovery gains and tightening product markets globally.