IEA sees oil supply surging 8 million bpd in 2027 after Hormuz recovery

The world oil market will recover gradually from the closure of the Strait of Hormuz before tipping into a significant surplus in 2027, the International Energy Agency said Wednesday.

The US and Iran reached an agreement to end the three-month-old war, which includes Iran reopening the Strait of Hormuz and the US lifting its naval blockade. The deal potentially ends the largest oil supply disruption in history, which shut in over 14 million barrels per day of Middle East oil output, according to the IEA's monthly oil market report.

"If the deal holds, exports and production from the Gulf should see a gradual recovery — not least because Iranian oil exports can fully resume once the US blockade is lifted," the agency, which advises industrialized countries, said.

The oil market will enter a significant supply overhang next year, the IEA said in its first look at 2027, with global oil supply set to surge by 8 million bpd and demand rising by just 2 million bpd. The resulting surplus would provide "a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in response to the crisis," the IEA said.

Recovery timeline faces logistical hurdles

The physical recovery in crude supplies will not happen overnight. ICIS projects the crude oil market will take around six months to normalize from the time the strait opens, under its "Extended" scenario which has the conflict ending in June 2026. The time needed for mine clearing, Gulf state field production restarts, vessel repositioning and insurance re-issuance would stretch the recovery to January 2027, said Kojo Orgle, ICIS analyst for US oil, gas and natural gas liquids.

Around 10 million bpd of oil supply has been lost since the conflict began in March, with Asian crude importers bearing the brunt of the impact through higher energy costs that forced some central banks to hike interest rates to stem inflation. The wider Asian market — notably net crude importers such as Thailand, the Philippines, India and South Korea — will look positively on the deal if the strait reopens, as inflationary pressures will ease with the recovery in crude oil supplies, Japan's Nomura said in a note.

Downstream markets feel the pressure

Asian petrochemical prices fell Tuesday following the peace deal, alongside a decrease in oil prices of more than 4%. China methanol futures plunged more than 8% on June 15 from their settlement price on June 12, on expectations that methanol supplies from the Middle East to China and the rest of Asia will recover.

The reopening of the Strait of Hormuz would likely accelerate an existing downtrend, but the pass-through to downstream chemicals will not be immediate, so the market could see a period of dislocation and heightened volatility, said Ann Sun, senior analyst at ICIS. "Much like the panic-buying seen in March and April, there is now a risk of overselling as sentiment rapidly unwinds risk premiums, even though logistics constraints may persist," Sun added.

The peace deal remains fragile. Fitch Ratings said June 15 there is a "high risk" that the strait does not open immediately if the US and Iran fail to sign their memorandum of understanding on June 19. "The peace deal is still fragile, but if it proves durable and commodity prices stay benign, this would positively impact Asia's economic outlook, as the region is a large net energy importer and has been the most adversely impacted from the Middle East energy shock," Nomura said.

This article is for informational purposes only and does not constitute investment advice.