Global oil demand is set to decline for the first time since 2020 as the Iran war wreaked havoc with production and exports in the Middle East, the International Energy Agency (IEA) said Friday.

World oil demand is set to decline by 1 million b/d year-on-year in 2026, which would mark its first annual decrease since the height of the Covid-19 pandemic in 2020, the IEA said in its latest oil market report.

This year's contraction is "highly skewed in both product and regional terms," as the closure of the Strait of Hormuz — the vital shipping route for oil and gas — disrupted exports through the Persian gulf, the agency noted.

A recovery is underway, the researchers added, though they warned renewed escalation in the conflict could complicate matters and further cloud the outlook.

The IEA's forecast rests on the assumption of a ceasefire and the gradual reopening of Hormuz, an outcome that looks increasingly uncertain as the U.S. and Iran traded hostilities this week. A number of ships came under attack and traffic through the Strait has once again slowed to a trickle. 

"While the global oil market balance looks set to swing back to surplus towards the end of the year, the forecast hinges on the assumption that tanker flows through the Strait will gradually recover, allowing producers to restart fields and refiners in the Middle East and elsewhere to resume product shipments," the IEA wrote. 

"Renewed exchanges of fire in the Gulf this week highlight the risks of not reaching a lasting peace agreement, which is a must for the normalization in oil markets."

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