The war in the Middle East is creating the largest supply disruption in the history of the global oil market, the International Energy Agency (IEA) states in its latest 'Oil Market' report for March. 

The agency points out that crude and oil product flows through the Strait of Hormuz have plunged from about 20-million barrels a day before the war to "a trickle" currently, with limited capacity available to bypass this waterway. Storage capacity is also quickly filling up, prompting Gulf countries to cut oil production by at least 10-million barrels a day.

"In the absence of a rapid resumption of shipping flows, supply losses are set to increase," it states, adding that diesel and jet fuel markets are particularly vulnerable to an extended loss of Middle East production and exports, given limited flexibility elsewhere to increase output.

"While the extent of losses will depend on the duration of the conflict and disruptions to flows, we estimate global oil supply to rise by 1.1-million barrels a day in 2026 on average, with non-OPEC+ producers accounting for the entire increase," the IEA says.

Meanwhile, the disruptions have resulted in oil price volatility, with the Brent crude price having risen to nearly $120/bl earlier this week before retreating somewhat.

The higher oil prices and a deteriorating global economic outlook has prompted the IEA to reduce its forecast for global oil demand growth in March and April by more than one-million barrels a day on average. The agency has also reduced its forecast for this year as a whole by between 210 000 bbl/d and 640 000 bbl/d.

The agency confirms that IEA member countries have agreed to make 400-million barrels of oil from their emergency reserves available to the market to mitigate the negative impact on economies from the supply disruptions.

"These additional oil supplies will be offered to the market by implementing emergency stock draws or other measures, according to national circumstances.

"The coordinated emergency stock release provides a significant and welcome buffer, but in the absence of a swift resolution to the conflict, it remains a stop-gap measure. The ultimate impact on oil and gas markets and the broader economy from the conflict will depend not only on the intensity of military attacks and any damage to energy assets, but also, crucially, on the duration of disruptions to shipping through the Strait of Hormuz.

"Adequate insurance mechanisms and physical protection for shipping are key to the resumption of flows, which is of paramount importance for the oil market," the IEA asserts.