The U.S.-Iran war intensified in recent days, while shipping disruptions are worsening across two of the world's most important oil transit routes. Traffic through the Strait of Hormuz has plunged, and Houthi attacks in the Red Sea are threatening another key export corridor for Middle Eastern crude.
Global Oil Supply Disrupted
Since the conflict escalated in late February, global oil supplies have fallen by about 11.1 million barrels per day, equivalent to roughly 10% of worldwide oil demand.
According to JPMorgan strategists led by Natasha Kaneva, the supply loss has pushed global oil inventories to record lows, as quoted on Yahoo Finance.
Why Oil Prices Haven't Reached Previous Highs
Despite the worsening geopolitical risks, oil prices remain well below the peaks seen earlier in the conflict.
Brent crude recently climbed above $101 per barrel last week, while U.S. WTI crude moved past $92. However, both benchmarks are still about $20 below their highs reached in April and May, as mentioned in the above-said Yahoo article.
Demand Destruction Has Offset Supply Losses
The Yahoo article went on to mention that JPMorgan strategists believe the primary reason oil prices have not surged further is the sharp decline in demand.
Oil consumption has weakened more rapidly than at any time in the past six years, excluding the pandemic-driven collapse in 2020. Had demand remained steady while inventories fell to current levels, prices would likely have risen much more sharply.
Instead, weaker consumption has helped rebalance the market and prevented a larger spike in crude prices.
IEA Sees Bigger Drop in Oil Demand
The International Energy Agency (IEA) now expects global oil demand to decline by 1 million barrels per day this year, despite noting that a gradual recovery in consumption is underway.
This marks a significant downgrade from its May forecast, which projected a decline of only 420,000 barrels per day, as quoted on Yahoo Finance.
In June, the IEA said that 2026 global oil demand growth will likely be negatively impacted by the Middle East crisis. The agency noted that high fuel prices and shortages of refined products have weighed heavily on consumption, turning the conflict into more than just a supply-side shock.
Supply to Top Demand in 2027?
In June, the IEA said that global oil demand is expected to recover modestly by 2 mb /d in 2027, and the IEA had forecasted that time supply growth of roughly 8 mb/d. As a result, supply could significantly outpace demand.
In July, IEA said that a recovery in world oil demand is underway, with consumption set to rise from its May nadir on seasonal trends and improving pent-up demand. An overall demand decline of 1 mb/d is expected this year. Forecast growth of 2 mb/d in 2027 results in a two-year clip of expansion, which is well below historical trends, per IEA.
Moreover, the United States paused its strikes against Iran over the weekend. Iran reportedly said it would halt its attacks as long as the U.S. pause in hostilities remains in effect, as quoted on CNBC.
Bottom Line
With renewed tensions taking place in the Middle East, demand may decline meaningfully in the near term. In June, IEA viewed 2027 as a year of oil market excess (read: IEA Sees Oil Market Excess in 2027: Should You Play Short Energy ETFs?).
United States Brent Oil Fund LP BNO was off 1.6% on July 24, 2026, despite heightening tensions. For the full week, BNO was up about 8%.
Hence, in the near term, oil prices may be volatile. Inverse oil and energy ETFs like MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN OILD, Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X ETF DRIP and ProShares UltraShort Energy DIG could see a spike if demand continues to be soft over the medium term.
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