LONDON, June 2 - The oil market could be underestimating risks tied to the conflict involving Iran, according to Tom Baker, managing director for Bahrain at global trader Vitol. Speaking at the S&P Global Energy Middle East Petroleum and Gas Conference in London, Baker outlined the scale of supply disruption and the potential implications for prices and physical supply.
Baker said that Iran’s effective closure of the Strait of Hormuz, together with attacks on energy infrastructure including oilfields and refineries, "have taken about 14 million barrels of Middle East supply offline, causing the largest oil supply crisis in history."
On the prospect of getting crude flows restored, Baker suggested recovery is possible for crude production but warned the downstream product network may face a tougher challenge. "Crude can come back online, but from a product perspective, it might be very hard for the system to catch up for the rest of the year," he said, noting a potential mismatch between available barrels and refined products.
He also cautioned that a critical moment could arrive when buyers seek physical cargoes and cannot find them. "The turning point could be when someone really needs those physical molecules and the physical molecules just aren’t there to buy," Baker said.
The Middle East tensions and the practical closure of the Strait of Hormuz pushed oil prices up to $126 a barrel at their peak, though they later eased and were trading at about $95 on Tuesday. Baker pointed to limits on how long markets can rely on inventories to bridge the shortfall and highlighted shifts in Chinese imports as another factor. "We can’t indefinitely draw down from inventories, China won’t indefinitely not import 5 million bpd, and at some point when they need those barrels, the price needs to go higher," he said, adding that the only solution to higher prices at that point would be demand destruction.
Demand destruction is the process where prices rise so high, due to supply shortages or other factors, that consumers are forced to curb purchases until demand recalibrates to supply and prices rebalance.
Vitol’s Baker added that demand destruction is unlikely to occur with oil prices falling towards $90 a barrel.
Context and implications
Baker’s remarks focused on the immediate physical tightness in crude and products, the constrained ability of inventories to act as a buffer, and the potential for price-driven demand responses if physical supply cannot meet need. He emphasized the difference between the ability to restore crude output and the complexities of matching refined product availability to demand over time.