Oil markets tighten as Middle East conflict disrupts supply and crushes demand
The International Energy Agency reports a near 5% drop in second-quarter crude demand, while the World Bank slashes its global growth forecast to 1.3% amid escalating supply chain disruptions.
Global crude oil demand contracted by nearly 5 per cent in the second quarter of 2026, according to data from the International Energy Agency, as soaring prices driven by Middle East hostilities suppressed consumption. The sharp decline in demand coincides with severe supply disruptions following the collapse of a US-Iran ceasefire, which has reignited conflict and blocked key maritime chokepoints. Brent crude prices have surged past $100 per barrel, while refining margins have hit record highs, signalling acute tightness in global fuel markets despite earlier warnings of a crude glut.
The physical supply picture has deteriorated rapidly with the effective blocking of two major shipping routes. Houthi attacks on Saudi tankers in the Bab el-Mandeb Strait have halted flows that Saudi Arabia had been using as an alternative to the Iranian-blocked Strait of Hormuz. Simultaneously, Ukrainian drone strikes on the Novorossiysk port in Russia have forced Kazakhstan to suspend most of its oil exports, removing approximately 1.7 million barrels per day from global supply. These disruptions have compounded the slowdown in Hormuz traffic, which has fallen to a trickle from its previous average of 20 million barrels daily.
Refined product markets are facing a distinct crisis, with global refining margins reaching all-time highs as supply constraints limit the conversion of crude into usable fuels. Ole Hansen, head of commodity strategy at Saxo Bank, noted that refined products face fewer mitigation options than crude, with several Middle Eastern refineries affected by conflict and Russia imposing temporary diesel export bans. This scarcity is already impacting consumption, with European diesel demand falling 5.7 per cent in May, while China saw diesel and gasoline demand drop by 10 per cent and 5 per cent respectively.
Strategic fuel buffers are being drawn down as a result of the ongoing volatility. Vortexa analyst Mick Strautmann highlighted that large-scale stock releases earlier in the conflict have meaningfully depleted reserves, leaving the global system vulnerable to further shocks. While Fatih Birol, head of the International Energy Agency, confirmed that OECD countries still hold over one billion barrels in emergency government-controlled stocks, he warned there is no room for complacency as commercial inventories continue to decline.
The economic fallout from these energy market disruptions has prompted the World Bank to revise its global growth forecast for 2026 down to 1.3 per cent, a significant drop from the 2.9 per cent expansion recorded in 2025. Chief economist Indermit Gill stated that this outlook reflects the severe headwinds posed by the war, raising tangible fears of a global recession if supply chain interruptions persist. With little immediate prospect for peace, the convergence of shrinking demand and constrained supply continues to weigh heavily on the global economy.
