US-Iran flare-up clouds IEA oil surplus forecast as Hormuz transit collapses

IEA warns of precarious recovery

The International Energy Agency cautioned on Friday that a fresh round of US-Iran hostilities could unravel its forecast of a substantial oil market surplus next year. In its monthly report, the Paris-based agency said global supply rose by 4.1 million barrels per day in June after a June 17 ceasefire and memorandum of understanding reopened the Strait of Hormuz, but output remained 9.4 million bpd below pre-war levels. World oil demand is on track to fall this year for the first time since 2020, as the conflict continues to disrupt production and exports across the Middle East. The IEA had projected a 4.62 million bpd surplus in 2027, contingent on a full return of Hormuz transits, compared with an 860,000 bpd deficit in 2026.

An escalation in hostilities on 7-8 July, however, clouds the outlook and could upend the forecast that sees the market flipping to a surplus next year.

The agency stressed that the effective closure of the strait during the worst of the fighting had removed as much as 14 million bpd of crude flows from global markets.

Strait transit at a standstill

Shipping through the Strait of Hormuz has ground to a halt after the latest attacks, with the fewest vessels in weeks braving the passage. Just 22 ships transited the waterway on Thursday, down from 49 on Tuesday when strikes began, according to maritime data firm Kpler. Before the war erupted in April, more than 130 ships navigated the strait on an average day. The current turmoil was triggered by rival interpretations of provisions governing the strait in the MoU, which had allowed a tentative recovery in traffic. On Tuesday, attacks on three commercial ships reignited tensions, with the US and Iran blaming each other.

The collapse in transit threatens to prolong the supply deficit and keep upward pressure on energy costs globally.

Oil prices steady but under pressure

Brent crude, the international benchmark, hovered around $76 per barrel in early Friday trading, little changed from Thursday but up more than $4 from the start of the week. Prices had begun the week near $72, roughly the pre-war level, and remain well below the peak of nearly $120 reached during the worst phase of the conflict. Analysts said the relative calm in prices reflected market confidence that the situation would stabilise, even as tightening inventories point to further upward pressure in the coming weeks. Stock markets in Asia posted gains of more than 1 percent, while S&P 500 futures were flat. US government bond yields edged lower, with the 10-year Treasury yield just over 4.5 percent, signalling some investor nervousness that higher oil prices could stoke inflation and prompt the Federal Reserve to keep interest rates elevated.

Diplomatic lull amid uncertainty

A lull in attacks on Thursday and Friday suggested behind-the-scenes diplomatic efforts to prevent a broader escalation. Unnamed sources cited by Al Jazeera said the pause opened space to revive diplomacy, though they cautioned that US military forces remain ready to resume operations. The resumption of fighting this week underscores the fragility of the June ceasefire and the deep disagreements over navigation rights in the strait. Iran asserts that ships must obtain its permission to transit the waterway, while the United States insists on freedom of navigation. With the IEA warning that even a partial disruption could upend the 2027 surplus forecast, the trajectory of oil markets hinges on whether diplomacy can restore stability to the region's most critical energy chokepoint.