Oil market could be underpricing risks, Vitol’s Bahrain chief says

By Robert Harvey

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.

Iran’s effective closure of the Strait of Hormuz and attacks on energy infrastructure including oilfields and refineries, have taken about 14 million barrels per day (bpd) of Middle East supply offline, causing the largest oil supply crisis in history.

“Crude can come back online, but from a refined 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,” Baker said, adding that so far refiners have been deferring purchases hoping a solution to the crisis might arrive soon.

STOCK DRAWS ARE NOT INDEFINITE

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.

Still, that’s more than 30% higher than they were before the conflict started on Feb. 28.

“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.

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. 

DEMAND DESTRUCTION NOT EVENLY SPREAD

Demand loss was around 4-5 million bpd due to the crisis when oil prices were closer to $110, Baker said, focused in Asia and Africa.

Meanwhile, in Europe and the U.S., there has been more of a delayed impact, he said, adding that demand has fallen in the U.S. but by a fairly small amount.

Baker said the likelihood of a U.S. crude or fuel export ban is extremely low as the price impacts would immediately feed back to the U.S. market.

(Reporting by Robert Harvey in London; editing by David Goodman and Jason Neely)