Analysis: Iran War May Cause Lasting Demand Destruction


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- The oil supply disruption of 2026 caused by the U.S.-Israeli 
war on Iran has upended the global energy outlook, reversing a projected 
oversupply to shortage instead.

   Just six months ago, the International Energy Agency (IEA) warned of a 
potential crude glut of 4 million bpd for this year. With the first quarter 
over now, the agency projects a 5.1 million bpd global draw for the second 
quarter as the largest oil supply disruption in history becomes entrenched.

   The outage has so far removed around 3% of yearly global oil supply from the 
market, with the market finding itself in a steep deficit since. The crisis has 
not only fundamentally changed supply outlooks, but soaring prices and 
logistical constraints are likely to stymy demand growth even further.

   The IEA now expects annual global oil demand to contract for the first time 
since the pandemic. The loss of millions of barrels per day of crude supply 
forced refiners east of the Suez to throttle runs and cut back on their use of 
crude. Refinery runs dropped by 6 million bpd month-on-month in April while 
global crude inputs is expected to be 1 million bpd lower than in 2025, the 
IEA's latest monthly oil market report estimated.

   For the second quarter, the Paris-based energy watchdog expects a 1.5 
million bpd decline in global oil and fuel demand.

   Impact from the crisis is not just limited to the consumption of now shut-in 
flows from the Persian Gulf. Oil prices in March saw the largest monthly 
increase in history and have for most of the past two months been at their 
highest since Russia's invasion of Ukraine in 2022. Front-month Brent futures 
have not closed below $90 bbl during the conflict. Compared to $72.48 bbl the 
day before Israel launched its first attacks on Iran in late February. The 
rally in crude led to soaring fuel prices, which along with the loss of 5 
million bpd of refined product flows from the Middle East, were compounded by a 
sizable slump in fuel production as refiners were forced to slow operations. 
Persistently high U.S. pump prices had in the past led to drops in demand and 
may deter non-essential travel this time just as the United States heads into 
main demand season.

   Diesel the Most Affected

   Prior to the conflict, U.S. gasoline demand was already forecast to find 
itself slightly below year-ago levels in 2026 as alternative fuels, electric 
vehicles (EV) penetration and engine efficiency gains more than compensated the 
increase in road travel.

   The U.S. Energy Information Administration, in its latest short-term energy 
outlook, forecast 2026 gasoline consumption to contract by 1.4% year-on-year, 
expecting an average retail price of $3.7 gallon, more than 19% higher than in 
2025. Since the outbreak of the war, the national average for a gallon of 
regular gasoline at the pump has risen by close to $1.1 gallon, or more than 
38%.

    

   Moving into the year, U.S. diesel and jet fuel consumption, in contrast to 
gasoline demand, was expected to set new records.  The recent rallies in middle 
distillate prices, which dwarfed the one in gasoline, however, may prevent this 
trend from continuing.

   EIA data show that the average on-highway diesel price jumped to $5.643 
gallon by early April and remained above $5.35 gallon at the end of the month, 
some 40% higher than pre-war levels.

   The closure of the Strait of Hormuz from blockades imposed as a result of 
the Middle East conflict has led to outsized impact on diesel compared to light 
distillates. This has prompted the EIA to forecast a 31% year-on-year increase 
in diesel retail prices, compared to a 12% growth rate in its March report.

   Consequently, the EIA flipped its distillate fuel oil consumption forecast 
from a 0.6% year-on-year expansion to a 0.4% decline. Jet fuel consumption 
expectations were adjusted from a growth of 0.9% to a 0.1% contraction.

   The longer the ongoing disruption lasts, the higher the impact that prices 
will have on fuel demand. Inflationary pressures from high energy prices are 
threatening a fragile recovery in energy-intensive industries and hurt 
consumers' spending power. They also make it more difficult for central banks 
to counter a consequent economic slowdown with monetary easing.

   The detrimental effects the largest oil supply crisis in history can have on 
demand growth are not limited to the near-term either. The events of the past 
two months may compel policymakers in major economies overly reliant on energy 
imports from the Middle East like China to speed up their transition away from 
fossil fuels. Russia's invasion of Ukraine four years ago accelerated this 
process in the European Union. Back then, however, physical supply losses were 
limited, with the continent replacing most of its former Russian crude and 
diesel imports with flows from the Middle East.

   This time, Europe can only turn to the U.S. to ease, but not resolve, the 
shortage. If the disruption is here to last, the EU may have, bar a return to 
Russian oil and gas, no choice but to implement energy consumption-limiting 
policies and lay plans for a faster phasing out of oil and gas.

   U.S. oil and refined product exports are set to stay elevated for the 
duration of the supply disruption, and in combination with domestic demand 
ramping up may leave inventories precariously low come peak driving season.




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