US-Iran Escalation Threatens Oil Supply Recovery, IEA Warns Inside the Global Fallout

The Pakistan Times Live 

 Islamabad Times  

The International Energy Agency has issued a fresh warning that renewed fighting between the United States and Iran threatens to derail the fragile recovery of global energy markets, just as the world economy had begun clawing back from what the IEA itself once called the largest oil supply disruption in the history of the global market. The Pakistan Times Live examines how this crisis has evolved, where the major regional and global powers stand today, and what could come next.

How the Crisis Reignited

The current standoff traces back to 28 February 2026, when the United States and Israel launched joint airstrikes against Iran, targeting military infrastructure and Iranian leadership — an operation that killed Iran's supreme leader Ali Khamenei. Iran retaliated with missile and drone strikes on Israel, US bases, and Gulf states, and moved to choke off traffic through the Strait of Hormuz, the narrow waterway through which roughly a fifth of the world's oil and LNG normally passes. Shipping through the strait collapsed almost overnight, triggering a historic supply shock, panic buying in parts of Asia, and a spike in Brent crude toward $120 a barrel before prices eased.

Months of on-and-off diplomacy — much of it mediated by Pakistan with backing from China — eventually produced a ceasefire framework in June, under which Iran agreed to reopen the strait and readmit international nuclear inspectors. Traffic briefly rebounded, hitting a two-month high in transits by late June. But the truce proved fragile: disputes over continued Israeli strikes in Lebanon, mutual accusations of violations, and a further escalation this week — after Trump declared the ceasefire "over" following renewed Iranian attacks on ships near Oman — have again brought fighting back to the region, closing the strait once more.

What the IEA Is Saying Now

According to the IEA's latest monthly report, the agency had been forecasting a substantial global oil surplus for 2027 on the assumption that the strait would return to full operation and Gulf output would keep recovering. That recovery had gathered pace through June, with global supply rebounding by roughly 4.1 million barrels a day as Gulf producers partially restored output. Global oil demand, meanwhile, was on track to fall this year for the first time since 2020, largely because of the disruption to production and exports across the Middle East, though a modest recovery had been underway on the strength of the earlier ceasefire deal.

The renewed hostilities put that recovery at risk. Brent crude has held relatively steady — trading around $76 a barrel — with analysts suggesting markets are betting the situation will stabilise again, even as tightening inventories point toward further price pressure in the weeks ahead. The IEA cautioned that even once a ceasefire takes hold, a full recovery will not be immediate, since sea mines will need to be cleared from shipping lanes and supply chains will take time to normalise.

The Gulf States: Urging Restraint

Gulf countries, several of which have themselves come under direct Iranian fire during the conflict — including strikes on Bahrain, Kuwait, and Jordan — have consistently pushed for de-escalation rather than taking sides outright. Egypt and Gulf states held phone consultations this week urging all parties to contain the renewed tensions, adding to a broader pattern seen throughout the war: the Gulf Cooperation Council has repeatedly pressed both Washington and Tehran to preserve whatever diplomatic gains have been made, even while Gulf states themselves have periodically been drawn into the fighting. Saudi Arabia and the UAE have relied on alternative export routes via the Red Sea and Fujairah to keep some oil flowing when the strait itself was blocked, though these routes remain vulnerable to attack and cannot fully replace Hormuz capacity.

Europe: Concerned but Divided

European reaction throughout the conflict has been mixed. EU leaders, including Commission President Ursula von der Leyen, have repeatedly called the situation "greatly concerning" and urged restraint from all sides, while European Council President Antonio Costa has specifically condemned attacks on civilian energy infrastructure as illegal. At the same time, individual European governments have taken varying positions: the UK authorised the use of its bases to help defend shipping in the strait, France authorised use of its bases and deployed a carrier to the Mediterranean, while Spain refused to allow its bases to be used for US operations connected to the offensive. NATO's Secretary-General Mark Rutte has broadly backed the US position, framing Iran as a genuine threat, even as the alliance officially describes itself as closely monitoring, rather than party to, the conflict.

Pakistan's Balancing Act

Pakistan has arguably played the most consequential diplomatic role of any country outside the direct combatants. Sharing a 900-kilometre border with Iran and maintaining close ties to both Tehran and Riyadh, Islamabad adopted a policy of official neutrality, condemning attacks by all sides while positioning itself as the primary channel for shuttle diplomacy. Pakistan brokered the original two-week ceasefire in April, later helped extend it, and hosted the first rounds of what became known as the Islamabad Talks. It also proposed, jointly with China, a five-point peace initiative calling for an immediate end to hostilities and unrestricted humanitarian access.

That role has come at real domestic cost. Pakistan faced its own energy crisis as Gulf-linked disruptions pushed fuel prices sharply higher — petrol and diesel prices surged more than 40 percent within a single month at one point — triggering public protests and business warnings over inflation, compounded by fears for remittances from the millions of Pakistani workers based in the Gulf. The Pakistan Navy launched a dedicated operation, Muhafiz-ul-Bahr, to help safeguard Pakistani merchant shipping and energy flows during the crisis. Pakistan's mediating position has occasionally been tested by domestic political pressures too, including controversy after a senior minister's sharply worded remarks about Israel drew criticism from Israeli officials questioning Islamabad's neutrality as a mediator.

China: Quiet Leverage, Loud Diplomacy

China has avoided any direct military involvement but has played an outsized behind-the-scenes role, given its position as Iran's largest oil customer and a major trading partner. Beijing has publicly condemned the US-Israeli strikes while officially maintaining that it will not take sides militarily, focusing instead on protecting the free flow of shipping through Hormuz — a route critical to its own energy security. According to reporting cited internationally, China played a significant role in persuading Iran to accept Pakistan's original ceasefire proposal, lending political weight to Islamabad's practical mediating channel. China and Russia have also used their UN Security Council vetoes to block Western-backed resolutions on the strait that did not reflect their preferred framing, while separately facing US sanctions over Chinese refineries continuing to process Iranian crude — sanctions Beijing has instructed its own companies and banks to disregard.

Analysis: A Fragile Peace Built on Competing Interests

What emerges from this pattern of reactions is a conflict where almost every major power has an economic or strategic stake in de-escalation, yet none has been able to guarantee it. Gulf states want stability because their own economies and security depend on it; Europe wants stability because energy price shocks feed directly into inflation and growth concerns; Pakistan wants stability because it is geographically and economically exposed on nearly every front — from its border with Iran to its reliance on Gulf remittances; and China wants stability because so much of its energy security runs directly through the strait. Even the United States, for all its military assertiveness, has repeatedly signalled interest in a negotiated resolution rather than open-ended conflict.

Yet this near-universal preference for stability has not translated into a durable peace, largely because the core disputes — Israel's continued operations in Lebanon, disagreements over what the ceasefire actually covers, and deeper questions about Iran's regional posture and nuclear program — remain unresolved. This suggests the current pattern is likely to continue: periods of fragile calm interrupted by renewed flare-ups, each one testing how much economic pain the wider world is willing to absorb before renewed diplomatic pressure forces another pause.

Conclusion

For now, the IEA's warning captures the essential uncertainty facing the global economy: a recovery that exists on paper, contingent on a de-escalation that has repeatedly proven difficult to sustain. The Pakistan Times Live will continue to track developments in the Strait of Hormuz crisis and its ripple effects across regional and global markets.

2026 The Pakistan Times Live. All rights reserved.