Vitol chief warns oil market underpricing Iran war risks
Tom Baker says physical shortages could force prices higher as inventory drawdowns and reduced Chinese imports reach their limit.
Tom Baker, Vitol’s managing director for Bahrain, warned on Tuesday that the oil market is underestimating the risks stemming from the conflict in Iran. Speaking at the S&P Global Energy Middle East Petroleum and Gas Conference in London, Baker highlighted that the effective closure of the Strait of Hormuz and attacks on regional energy infrastructure have removed approximately 14 million barrels of Middle Eastern supply from the market. He described the situation as the largest oil supply crisis in history.
Although the conflict initially drove crude prices to a peak of $126 a barrel, values have since receded to approximately $95 a barrel. Baker cautioned that while crude supply might eventually return, the refining and product side of the market could struggle to catch up for the remainder of the year. He noted that the critical turning point will arrive when buyers require physical molecules that are simply unavailable.
The trader emphasised that current market buffers are finite. Baker stated that inventory drawdowns cannot continue indefinitely, nor can China sustain its current reduction in imports, which stands at around 5 million barrels per day. He argued that when these constraints bite, physical supply shortages will force prices higher, with demand destruction becoming the only mechanism to rebalance the market.
Demand destruction occurs when prices rise so sharply due to supply shortages that consumers are forced to curb purchases until demand recalibrates to supply levels. Baker assessed that this process is unlikely to occur if oil prices fall towards $90 a barrel, suggesting that the current price level does not yet reflect the severity of the underlying physical tightness.
The comments underscore the fragility of global energy markets amid geopolitical instability. With the Strait of Hormuz effectively closed and infrastructure under attack, the disparity between available product and physical demand is widening. Investors and policymakers are now watching closely to see if the market will correct through price escalation or if demand destruction will become necessary to restore equilibrium.
