A comprehensive analysis of the latest IEA report reveals a market in flux, with significant demand contractions expected in 2026 before a sharp recovery in 2027. The report highlights geopolitical tensions and supply disruptions as key drivers reshaping the global energy landscape.

Demand Outlook: A Rocky 2026 Before a Full Rebound

Global oil demand is projected to fall by 2.5 million barrels per day in 2026, a steeper decline than the previous month's forecast by an additional 0.94 million barrels per day. The prolonged stalemate in US-Iran negotiations has pushed expectations for normalized oil flows further into the future. The demand reduction is concentrated in middle distillates and petrochemical feedstocks, with the Asia-Pacific region particularly hard hit. Looking ahead, 2027 is expected to see a rebound of 2.6 million barrels per day, effectively offsetting the annual decline witnessed in 2026.

The demand picture for 2026 reveals global weakness, with Q2 reaching the year's trough. China is the primary drag, with its full-year demand falling by 0.66 million barrels per day year-on-year. In contrast, the US and Brazil are bucking the trend with modest growth of 0.11 and 0.06 million barrels per day, respectively. Developed economies in Europe, Japan, South Korea, and Canada are experiencing minor declines. By 2027, the market is set for a comprehensive recovery, with China emerging as the core engine of growth, adding 0.67 million barrels per day year-on-year, completely reversing the previous year's slump. India and Russia are contributing 0.20 and 0.06 million barrels per day, respectively, while only Canada shows a slight decline of 0.03 million barrels per day. This paints a picture of regional divergence, characterized by "China driving the cycle, the Americas showing resilience, emerging markets providing incremental growth, and developed economies facing stagnation."

In 2026, geopolitical conflicts and high oil prices are causing all oil product categories to contract simultaneously year-on-year. Diesel suffers the steepest decline, dropping 0.69 million barrels per day, followed by gasoline at 0.47 million barrels per day, while jet fuel shows resilience with only a modest 0.07 million barrels per day dip. However, as supply chains repair in 2027, all product classes are expected to recover. LPG & Ethane leads the rebound with a year-on-year increase of 0.97 million barrels per day, followed by diesel at 0.48 million barrels per day. Gasoline, naphtha, and jet fuel are projected to rise by 0.26, 0.44, and 0.26 million barrels per day, respectively, while fuel oil sees only marginal growth of 0.06 million barrels per day. Despite the recovery, naphtha, fuel oil, and other products in 2027 are still expected to be below their 2025 baseline levels. Gasoline's long-term recovery remains constrained by the increasing adoption of electric vehicles.

Supply Dynamics: OPEC+ Drives Expansion, Then Plateaus

Supply growth in the latter half of 2026 is primarily driven by OPEC+. From Q2 2026 to Q2 2027, global crude production is set to rise from 96.82 million barrels per day to 108.76 million barrels per day. OPEC+ output is the core force behind this supply expansion, surging from 39.75 million barrels per day to 46.07 million barrels per day. Within the Gulf, Saudi Arabia, Iraq, and the UAE are the main contributors to the increase. Non-OPEC+ production shows weaker elasticity, only inching up from 59.49 million barrels per day to 62.69 million barrels per day. As we move into late 2027, OPEC+ and Gulf state output approaches its peak, leaving limited room for further increases, and global supply growth will increasingly rely on modest gains from non-OPEC+ producers.

Due to heightened security risks in the Gulf region, over 10 million barrels per day of capacity were shut in. August saw global oil production fall by 1.6 million barrels per day month-on-month to 100.1 million barrels per day. Total annual oil supply is expected to decrease by 5.7 million barrels per day to 100.7 million barrels per day, with the recovery of Gulf region capacity now postponed until 2027. Production in 2027 is projected to rebound by as much as 8 million barrels per day. Non-OPEC+ output growth is spearheaded by five American nations, adding 1.4 million barrels per day in 2026 and a further 1 million barrels per day the following year.

Focusing on August, OPEC member output increased by 346 thousand barrels per day month-on-month, primarily driven by a boost from Iraq. Iran saw a significant output cut, while Saudi Arabia slightly reduced its production. Among non-OPEC Declaration of Cooperation partners, Russian output cuts offset gains from Kazakhstan, resulting in a net increase of 297 thousand barrels per day for all DoC countries in August compared to July.

Refining and Cracking: Margins Diverge Across Basins

In August, refinery throughput reached a summer peak of 81.4 million barrels per day, up 0.96 million barrels per day month-on-month but down a substantial 4.2 million barrels per day year-on-year. The decline is concentrated in the Middle East, Russia, and Asian crude-importing economies. Global refinery runs are expected to fall to 81.5 million barrels per day in 2026, a decrease of 2.6 million barrels per day. Refining margins in the Atlantic Basin hit an all-time high in August, driven by a sharp increase in diesel crack spreads. Conversely, soaring freight costs are weighing on refining profitability in the Singapore region.