Oil market still facing major supply flood despite Iran conflict risk: IEA

Oil markets are oversupplied and remain on course for a major surplus before the end of the decade, according to the International Energy Agency, despite mounting near-term concerns over the Israel-Iran conflict triggering a supply shock.

Responding to spiraling tensions in the Persian Gulf, the IEA has said it is on call for emergency supply injections, warning of severe disruptions for the global energy system if capacity is shut in.

"While the market looks comfortably supplied now, the recent events sharply highlight the significant geopolitical risks to oil supply security," said the Paris-based energy watchdog in its latest June 17 report.

However, in the absence of material shocks to flows from the region, weak market fundamentals will prevail, the IEA added, seeing macroeconomic pressure and surging Chinese electric vehicle uptake continuing to sap demand growth.

Structural shift

In its annual mid-term outlook, "Oil 2025", the IEA maintained its position that global oil demand will peak at around 106 million b/d in 2029, up from roughly 103 million b/d in 2024.

Chinese demand is now on course to peak by 2027, two years earlier than previously expected, marking a key inflection point for what was once a key engine of oil consumption growth. Beyond that point, world oil consumption growth could slow to "just a trickle", driven mostly by India, the IEA said,

Faster-than-expected Chinese EV adoption could mean that further growth is running out of steam, the IEA said, writing that Beijing's 2024 stimulus measures had proved influential in supporting vehicle switching. New agency forecasts cut peak demand in China to 16.9 million b/d from 18 million b/d in its previous year's report, reflecting accelerated declines in diesel and gasoline consumption that began in 2021.

Saudi Arabia, too, could slash its total oil consumption by over 600,000 b/d between 2024 and 2030, bucking an overall growth trend in the Middle East as it pivots from oil-based power supply to natural gas and renewables.

Economic headwinds

Globally, markets remain exposed to a "stagflationary cocktail" and high trade barriers that could stifle growth, the IEA said.

Sweeping tariffs imposed by the US administration of President Donald Trump in April have already prompted the IEA to drastically reduce its 2025 growth outlook this year, triggering what it dubbed a "paradigm shift" in the world economy.

In Q2 2025, weak consumption in the US and China supported further downgrades, the IEA said, outweighing resilience observed across other global markets.

The agency now sees oil demand growth climbing by just 720,000 b/d annually in 2025 and 740,000 b/d in 2026, each revised down by 20,000 b/d from its previous month's report.

The outlook stands in contrast to OPEC, which expects new trade deals to protect markets from significant economic contraction. In its June 16 report, the alliance saw world oil demand jumping 1.25 million b/d in 2025 and 1.28 million b/d in 2026.

Analysts at S&P Global Commodity Insights have struck a less bullish tone, and last projected some 770,000 b/d of oil demand growth in 2025, slowing to 740,000 b/d in 2026.

Supply growth

Though world oil inventories remain tight by historical norms, recent injections could provide an early warning sign of a growing supply imbalance, the IEA said.

According to its figures, global observed oil inventories climbed by an average of 1 million b/d since February and rose by a massive 93 million barrels in May alone.

Yet as OPEC+ has pushed ahead with supply injections and output from the Americas has stayed resilient, few producers could be willing to pull supply-side levers to respond to an oil glut.

Revised estimates from the IEA put world oil supply growth at 1.8 million b/d in 2025 and 1.1 million b/d in 2026, up from a projected 1.6 million b/d and 970,000 b/d in its previous report.

Like demand, supply capacity growth is expected to be concentrated in the coming years, the IEA said, anticipating contraction after 2029 as the pipeline of non-OPEC+ projects clears.

A weaker oil price environment is expected to hit investment in new production, particularly in the US, and total upstream spending is set to drop by roughly 6% in 2025, the IEA said. However, non-shale producers are expected to stay resilient in a weaker price environment, keeping production high.

"All else being equal, global oil supply would rise to 107.2 mb/d by 2030, 1.7 mb/d higher than projected demand, suggesting prices would have to drop to prevent an untenable stock build," the report said.