Vitol Bahrain Chief Warns Oil Market Is Underpricing Geopolitical Risks
Geopolitical Tensions and Their Impact on the Oil Market
Underpricing of Risks from the Iran War
LONDON, June 2 (Reuters) - The oil market is underpricing some risks from the Iran war, global commodity trading house Vitol's managing director for Bahrain, Tom Baker, said on Tuesday.
Supply Disruptions in the Middle East
Iran's effective closure of the Strait of Hormuz and 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.
Challenges in Restoring Supply
"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," Baker said at the S&P Global Energy Middle East Petroleum and Gas Conference in London.
"The turning point could be when someone really needs those physical molecules and the physical molecules just aren't there to buy."
Market Reaction and Price Movements
The Middle East conflict and effective closure of the Strait of Hormuz sent oil prices as high as $126 a barrel, though they have since receded and stood at about $95 on Tuesday.
Inventory Drawdowns and Demand Factors
"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," Baker said, adding that the only solution to higher prices at that point would be demand destruction.
Understanding 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.
Reporting Credits
(Reporting by Robert Harvey in LondonEditing by Sharon Singleton and David Goodman)
