The oil market is expected to enter a substantial supply surplus in 2027 after rebounding from the closure of the Strait of Hormuz, the International Energy Agency (IEA) said in its monthly report Wednesday.

The U.S. has announced an interim agreement to end the Iran war, which includes Iran reopening the key waterway and the U.S. lifting its naval blockade of Iran, potentially bringing an end to the largest oil supply disruption in history.

The war is estimated to have blocked more than 14 million barrels ​per day (bpd) of Middle East oil output according to the IEA.

"If the deal holds, exports and production from the Gulf should see a ​gradual recovery – not least because Iranian oil exports can fully resume once the U.S. blockade is lifted," the agency, which ⁠advises industrialized countries, said.

The oil market will then fall into a significant supply overhang next year, the IEA said in its first look at 2027, as oil ​supply is set to surge by 8 million bpd while demand rises by just 2 million bpd.

Middle East supply already rising

Flows through the strait were already rising by early June because of ​a pick-up in ship-to-ship transfers in the Gulf of Oman, the IEA said, helping to boost total Middle East flows to around 12 million bpd in early June from a May low of 9.6 million bpd.

However, political and operational constraints, including prolonged demining and unresolved transit arrangements, leave downside risks to the Middle East recovery outlook, the IEA said.

Overall, the IEA forecasts ​oil supply to fall by 3.9 million bpd in 2026, as production losses in the Middle East outpace rising output from the Americas.

Russian crude oil and refined ​fuel exports were stable at around 7.4 million bpd in May despite continued Ukrainian drone attacks on refineries, the IEA said, though the attacks forced Russia to prioritize fuel ‌supply to ⁠the domestic market and to maximize crude oil exports.

Demand destruction spreads

Global oil demand will fall by 1.1 million bpd this year according to the IEA, after a 5 million bpd April-June drop.

Demand destruction has spread beyond the areas that were initially most impacted by the Iran war, the IEA said, with deliveries of all major fuels and especially gasoil "showing signs of strain across almost all regions."

Demand will then recover swiftly and grow next year, as falling oil prices and an improving ​economic outlook drive the rebound, the ​IEA said.

In its own monthly report, ⁠rival forecaster OPEC lowered its forecast for oil demand growth in 2026 to 970,000 barrels per day.

Large surplus looms in 2027

The IEA forecasts imply that supply will come in around 920,000 bpd below total demand in 2026, according to Reuters' calculations, narrowing ​from a 1.78 million bpd deficit in the previous month's report.

The IEA's 2027 forecasts imply that supply will ​outweigh demand by 5.05 ⁠million bpd next year, as demand growth is overshadowed by supply ramping up as Middle East barrels return.

The global oil market tipping into a large surplus in 2027 could "provide a welcome respite to the market and an opportunity to replenish depleted inventories, or to build new strategic reserves, as countries review their energy strategies and policies in ⁠response to ​the crisis," the IEA said.

However, oil inventories could plunge further to historic lows before the ​market balance is able to shift to a surplus towards the end of this year, the IEA said.

Inventories have fallen at a rate of 3.8 million bpd since the start of the war on Feb. ​28, with stock draws in May alone at around 4.6 million bpd, according to preliminary IEA data.