A peace agreement between the United States and Iran has triggered a dramatic reversal in oil market dynamics, with the International Energy Agency warning that global supply could soon outpace demand growth. The shift marks a sharp contrast to conditions during the conflict, when supply disruptions seemed imminent.
The recent memorandum of understanding, set for ceremonial signing in Geneva, centers on reopening the Strait of Hormuz and lifting the US naval blockade in the region. The agreement also includes financial incentives for Iran if it meets certain benchmarks. Both President Donald Trump and Vice President JD Vance have digitally signed the document, along with Iran's parliamentary speaker Mohammad-Bagher Ghalibaf on Tehran's behalf.
During the war, Middle East instability and concerns about disruptions through the Strait of Hormuz had created expectations of tight oil markets and higher prices. The IEA now projects that production capacity could outpace consumption as normalcy returns to the region, representing a significant challenge for energy producers who had ramped up output anticipating sustained high prices.
The timing of the peace deal arrives as California's jet fuel supply has dropped to levels unseen since 2023. As of April 17, the state held just over 2.6 million barrels of jet fuel, compared to 3.2 million barrels two years earlier, according to the California Energy Commission. California received 61.1 percent of its oil supply from foreign sources in 2025, a majority from Asian refiners. The supply disruption caused jet fuel prices to surge, with costs averaging $2.30 per gallon in early 2026 but reaching $4.19 per gallon by April 24. At Los Angeles International Airport, jet fuel costs climbed close to $15 per gallon.
According to Sandy Louey, a spokesperson for the California Energy Commission, "Jet fuel supply is tight globally. California prices reflect that pressure, though the US is better positioned due to domestic refining infrastructure and crude supply that Europe lacks."
The supply squeeze has prompted airlines including Delta, Southwest, and JetBlue to introduce increased baggage fees and fuel surcharges. Some travel experts predict that barring further geopolitical changes, shorter-haul flights that are less profitable will likely be cut, potentially snarling travel plans despite sustained passenger demand.
The shift from supply shock to potential oversupply illustrates how quickly energy markets can transform based on geopolitical developments. The IEA projection carries significant implications for energy policy and investment decisions. Producers may need to adjust output plans, while consuming nations could benefit from lower prices if the surplus materializes. However, the forecast depends on the durability of the peace agreement and whether production in Iran and neighboring countries returns to pre-conflict levels.