Investing.com -- The International Energy Agency (IEA) cut its forecast for global oil demand this year, saying the fallout from the war in the Middle East, including restricted fuel supplies, soaring prices and a weakening economic outlook, is driving the sharpest contraction in years. Before you buy NVIDIA: our AI model's stock picks are beating the market by 120%+. See the list now » World oil demand is expected to fall 2.5 million barrels a day year-over-year in the fourth quarter, with the agency now projecting a 2026 annual decline of 2.6 million barrels a day, steeper than the 2.5 million-barrel-a-day drop forecast last month, citing the Iran war's disruption and soaring prices.

Diesel alone will account for a quarter of the decline. A partial rebound of 2 million barrels a day in 2027 would still leave global oil use 620,000 barrels a day, or 0.6%, below 2025 levels, IEA said. IEA said global production rose 2.5 million barrels a day to 102.3 million barrels a day in September, driven by Gulf producers, with OPEC+ gains of 2.1 million barrels a day led by Saudi Arabia. The agency now expects supply to fall by 5.8 million barrels a day for the full year, a slightly steeper decline than the 5.7 million-barrel-a-day drop forecast in its previous report, before rebounding 7.7 million barrels a day in 2027.

"Renewed attacks in the Gulf leave the recovery fragile," the IEA said, warning that the recent escalation threatens September's recovery in Middle East exports.

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Our AI's list of investor-grade stock picks for October just dropped » Russian production edged up 65,000 barrels a day from August to 8.43 million barrels a day in September, though that remains 870,000 barrels a day below year-ago levels. The agency now sees world oil supply running 1.73 million barrels a day below demand in 2026, marginally narrower than the 1.74 million-barrel-a-day deficit it projected last month. Prices have surged as a result of the supply disruptions. North Sea Dated crude jumped $26.17 a barrel in September to $116.89, and was trading around $134 at the time of writing, a 43% increase since the start of September. Brent futures have risen 13% over the same period, to about $107.

The IEA pointed to the Sept. 11 bombing of the Saudi East-West Pipeline and a sharp rise in freight rates as key drivers of the rally. Diesel markets remain under the most acute strain. Global exports fell 700,000 barrels a day year-over-year in September, as losses from Russia and the Middle East outpaced gains elsewhere. Wholesale diesel prices hit all-time highs near $220 a barrel in Europe and the U.S. in September, nearly double crude oil prices.