IEA projected in its latest monthly oil market report that world demand will decline by 1 million barrels a day this year compared with last year, marking the first annual drop since the depths of the Covid-19 pandemic

World oil demand is on track to drop for the first time since 2020, the International Energy Agency (IEA) said Friday, as the war between Israel and Iran disrupted production and exports across the Middle East.

The agency projected in its latest monthly oil market report that world demand will decline by 1 million barrels a day this year compared with last year, marking the first annual drop since the depths of the Covid-19 pandemic.

The contraction is highly skewed in both product and regional terms, the IEA said, after the closure of the Strait of Hormuz disrupted exports through the Persian Gulf.

The agency said a recovery is underway but warned that renewed fighting could cloud the outlook further. Its forecast assumes a ceasefire holds and that the Strait gradually reopens, an outcome that looked increasingly uncertain this week after Iran and U.S. traded fire. Several ships have come under attack, and traffic through the strait has slowed to a trickle once again.

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.

Oil prices were little changed Friday but headed for solid weekly gains, as traders weighed renewed Iran-U.S. hostilities against expectations the war stays contained without seriously disrupting Persian Gulf crude supplies.