Oil Markets Suffer From Hormuz Shock as Global Demand and Supply Weaken
The global oil market has entered one of its most volatile periods in modern history, as the war in the Middle East and the disruption of traffic through the Strait of Hormuz trigger shocks to supply, demand, refining and trade flows.
According to the latesy Oil Market Report by the International Energy Agency, the conflict has already removed nearly 13 million barrels per day (mb/d) of oil supply from global markets since February, while demand is now expected to contract for the first time in years.
The IEA describes the situation as an unprecedented supply shock, warning that mounting inventory losses and continued uncertainty over the Strait’s reopening could keep oil markets under severe strain well into 2027.
At the center of the crisis is the Strait of Hormuz, the narrow maritime chokepoint through which a fifth of global oil trade normally passes. More than ten weeks after the outbreak of war, tanker traffic remains restricted, reducing exports from Gulf producers including Saudi Arabia, Iraq, Kuwait, Qatar and the United Arab Emirates.
The IEA estimates cumulative supply losses from Gulf producers have already exceeded one billion barrels.
Global oil supply fell another 1.8 mb/d in April to 95.1 mb/d, leaving output 12.8 mb/d below pre-war levels. Gulf production alone was down by 14.4 mb/d compared with February levels.
The agency expects global oil supply to decline by an average of 3.9 mb/d in 2026, reaching 102.2 mb/d for the year.
The sudden supply disruption has driven extraordinary price volatility. North Sea Dated crude traded within a $50-per-barrel range in April, surging to $144 per barrel before retreating below $100 and rebounding again. Average prices rose by approximately $16.50 month-on-month to $120.36 per barrel.
Is a Market collapse on the way?
Despite the historic loss of supply, the market has not experienced outright collapse because of several mitigating factors. Atlantic Basin producers such as the United States, Brazil, Canada, Kazakhstan and Venezuela have boosted exports, redirecting cargoes toward Asian markets previously dependent on Gulf supplies. According to the report, Atlantic Basin exports have risen by 3.5 mb/d since February.
Strategic stock releases have also played a role. The IEA said global inventories fell by 250 million barrels over March and April, equivalent to around 4 mb/d. OECD on-land stocks alone plunged by 146 million barrels in April.
Still, the agency warns that the drawdown is occurring at an unsustainable pace. In a special market analysis, the IEA projected cumulative oil deficits could reach 900 million barrels by September 2026, even after accounting for a coordinated 400 million barrel emergency stock release. Rebuilding those reserves would require 1 mb/d of additional supply for three consecutive years.
At the same time, the conflict is destroying demand. The IEA now forecasts global oil consumption will contract by 420,000 barrels per day year-on-year in 2026 to 104 mb/d, a downgrade of 1.3 mb/d from pre-war expectations.
Demand destruction is being driven by fuel costs, weakening economic growth and government-imposed energy-saving measures. The steepest contraction is expected in the second quarter of 2026, when global demand is projected to fall by 2.45 mb/d year-on-year.
Petrochemicals and aviation seem to be the sectors most severely affected. Supplies of LPG, ethane and naphtha from the Gulf have been non-existent, disrupting feedstock availability for Asian petrochemical plants. The IEA estimates LPG/ethane and naphtha account for half of the total demand downgrade from pre-war forecasts.
Jet fuel demand has also deteriorated as airlines reduce flights in response to higher fuel prices and regional airport closures. Global passenger traffic declined for the first time in five years in March, according to IATA data cited by the report. Airports in Iran, Iraq and Kuwait remain closed, while flight activity in the UAE has only partially recovered.
Meanwhile, refiners worldwide are struggling to adapt to the new supply landscape. Global refinery crude throughput is forecast to plunge by 4.5 mb/d during the second quarter to just 78.7 mb/d, while annual throughput for 2026 is expected to fall by 1.6 mb/d. Infrastructure damage, feedstock shortages and export restrictions are all constraining operations.
Paradoxically, refining margins remain historically high because shortages are now spreading from crude into refined products. Middle distillate cracks have reached record levels, and the market for jet fuel and diesel has tightened as well.
The impact has been especially severe in Asia, where economies rely on Gulf crude and LPG imports. China’s seaborne crude imports fell by 3.6 mb/d between February and April, while imports into Japan, South Korea and India also dropped.
India has been particularly exposed to disruptions in LPG supplies. Gulf LPG exports through Hormuz fell from nearly 1.5 mb/d in 2025 to only 270,000 barrels per day in April. Although the United States increased LPG exports by 450,000 barrels per day, global markets have not been able to fully replace lost Gulf supply.
For now, the IEA’s base case assumes that flows through the Strait of Hormuz gradually resume from June onward. However, even under that relatively optimistic scenario, they warn that supply recovery will lag demand recovery, leaving oil markets undersupplied through most of 2026.
Capital Link Editorial
