Oil Market Underpricing Risks as Iran War Supply Crisis Persists

Vitol's Bahrain Chief Tom Baker warns that the oil market may be underpricing risks due to the Iran war. The conflict has led to a significant supply crisis, with approximately 14 million barrels of Middle East supply taken offline.

Baker stated at the S&P Global Energy Middle East Petroleum and Gas Conference in London that '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.'

The effective closure of the Strait of Hormuz and attacks on energy infrastructure have caused oil prices to surge as high as $126 per barrel. Although prices have receded to around $95 per barrel, Baker believes that they will need to rise again when demand reverts to pre-crisis levels.

Baker explained that 'at some point when [China] needs those barrels, the price needs to go higher.' He added that this would necessitate demand destruction, a process where high prices force consumers to curb purchases until demand recalibrates with supply and prices rebalance.