Global Oil Demand Set for First Annual Decline Since Pandemic as Supply Disruptions and High Prices

By zoey

Global oil demand is expected to decline in 2026 for the first time since the economic disruption caused by the COVID-19 pandemic in 2020, reflecting the combined impact of elevated energy prices, geopolitical instability, and shifting consumption patterns in major economies, according to the latest report from the International Energy Agency (IEA).

The agency projects that worldwide oil demand will fall by approximately 1 million barrels per day this year, marking a significant reversal after years of post-pandemic recovery.

Analysts say the downturn has been driven primarily by sustained high crude prices and prolonged supply disruptions that have affected regions differently, with Asia experiencing the sharpest slowdown.

A major factor behind the decline has been the conflict between the United States and Iran, which severely disrupted oil transportation through the Strait of Hormuz, one of the world’s most strategically important shipping routes for crude oil and liquefied natural gas.

During the height of the conflict, numerous tankers carrying crude oil remained stranded in the Persian Gulf for more than three months because of security concerns and the risk of military escalation.

Energy analysts warn that although hostilities have eased, uncertainty surrounding the Strait of Hormuz remains elevated. Jim Burkhard, Vice President and Head of Crude Oil Research at S&P Global Energy, said the waterway remains far less predictable than before the conflict began.

According to Burkhard, Iran continues attempting to exert influence over the vital shipping lane, while the United States has yet to restore normal commercial confidence in the region. As a result, shipping companies and energy traders remain cautious, making a return to prewar operating conditions increasingly unlikely.

The effects of the disruption have been reflected in global consumption figures. Average worldwide oil demand fell to approximately 97.9 million barrels per day in May, representing a decline of about 5.3 million barrels per day compared with the same period last year.

Asia accounted for the largest share of the decline as many economies in the region depend heavily on crude imports from the Middle East. China experienced the steepest reduction, with oil demand dropping by around 1.5 million barrels per day, or roughly 9%, making it the single biggest contributor to the global slowdown.

China’s response to higher oil prices has played a significant role in stabilizing international crude markets despite ongoing geopolitical tensions. Rather than maintaining previous import levels, Chinese authorities sharply reduced purchases from global suppliers as prices climbed during the spring.

Burkhard explained that China relied heavily on its extensive crude oil inventories, allowing the country to significantly reduce imports without immediately affecting domestic energy needs. By drawing from stockpiled reserves instead of purchasing additional crude, China effectively cut its buying activity by nearly half during the crisis.

Another important factor has been China’s decision to temporarily suspend the rapid expansion of its Strategic Petroleum Reserve.

Daniel Sternoff, Senior Fellow at Columbia University’s Center on Global Energy Policy, noted that China had previously been adding close to one million barrels per day to its emergency reserves before slowing those purchases during the market disruption.

The country’s long-term transition toward electric vehicles has also accelerated the reduction in oil demand. As EV adoption continues to expand across China, consumption of gasoline and diesel for road transportation has weakened substantially.

Sternoff estimates that China could see demand losses of between 500,000 and 600,000 barrels per day for gasoline and diesel alone during the current crisis, highlighting how structural changes in transportation are beginning to reshape global oil consumption beyond temporary geopolitical events.

Despite continued tensions between Washington and Tehran, oil prices have not experienced the dramatic spikes many analysts feared.

A fragile ceasefire reached in June allowed some oil tankers to resume transiting through the Strait of Hormuz, increasing crude supplies available to global markets and easing immediate concerns over shortages.

Although military tensions flared again earlier this month, market reaction remained relatively restrained. Burkhard said the ongoing confrontation has evolved into a prolonged “gray zone” conflict that creates periodic market volatility without triggering the severe supply shock witnessed during the early stages of the crisis.

Market analysts also point to weakening global demand as another reason prices have remained under control. With China importing significantly less crude and refinery operations disrupted in several regions, there are fewer buyers competing for available supplies.

Russian refining capacity has also been affected after multiple facilities sustained damage from Ukrainian drone strikes, while several refineries across the Middle East continue operating below normal capacity following damage suffered during the conflict. These refinery constraints have created an unusual imbalance in energy markets.

While larger volumes of crude oil have gradually returned to international markets, the reduced ability to refine that crude into gasoline, diesel and other petroleum products has kept fuel prices elevated for consumers. As a result, prices for refined fuels have remained relatively high even as crude oil prices have eased from their peak levels.

Burkhard said the market is currently experiencing an unusual situation in which crude supplies are becoming more readily available, but demand has weakened considerably, limiting the upward pressure on oil prices.

In the United States, however, fuel consumption has remained surprisingly resilient despite significantly higher gasoline prices. According to data from AAA, the national average price for regular gasoline climbed above $4.50 per gallon in May, more than 50% higher than levels recorded before the conflict began.

Even with higher prices at the pump, gasoline demand increased during the second quarter of 2026 as Americans continued traveling and commuting.

Analysts attribute the resilience to several factors. Household spending on gasoline has steadily declined as a share of overall income over the past decade, making consumers less sensitive to fuel price increases than in previous years.

Additionally, more employees have returned to office-based work, increasing commuting activity and boosting gasoline consumption.

Sternoff noted that while gasoline prices remain a politically sensitive issue and attract significant public attention, many higher-income households are able to absorb increased fuel costs without substantially changing their driving habits.

The IEA’s latest outlook underscores how geopolitical conflicts, changing consumer behavior, strategic government policies, and the accelerating transition toward cleaner transportation technologies are collectively reshaping the global energy landscape.

While supply risks remain elevated due to ongoing instability in the Middle East, weakening demand—particularly from China—is increasingly becoming the dominant force influencing global oil markets, helping to prevent sharper price increases despite continuing geopolitical uncertainty.