Oil is hovering around $100 a barrel, but the next shock could come from four pressure points that have little to do with the headline price itself. A $750 million commodities fund manager says dwindling US reserves, collapsing oil demand, China's purchase dynamics, and the market's ability to replace disrupted supplies could determine where crude goes next.
Jeffrey Baird, managing partner at Merritt Point Partners, has spent 25 years trading commodities. His fund specialises in commodities and uses long and short options strategies across the asset class, which has reportedly returned over 16% in the past 12 months.
Speaking to Business Insider, Baird said the market remains unusually difficult to assess after the US military's February strike on Iran and the subsequent Strait of Hormuz blockade. JPMorgan analysts similarly said in a research note this week that they did not have a clear baseline for how the conflict could ultimately unfold.
Baird concurred that 'we don't know what's going to happen,' but there are multiple signals to look for.
Depleting US Strategic Oil Reserves
The US Strategic Petroleum Reserve has been supplying roughly 25 million barrels a month over the past five months, according to Baird.
The reserve now stands at about 285 million barrels, leaving roughly 33 million barrels above the 252 million-barrel threshold that limits certain types of further drawdowns.
Baird warned that the US cannot continue relying on inventories indefinitely.
Operational difficulties could add another complication. Some storage caverns may contain oil that is difficult to extract, while recent withdrawals have slowed sharply, according to the hedge fund manager.
If reserve releases remain subdued, refiners could eventually have less spare inventory available to cushion further supply disruptions.
Those limitations could explain why reserve outflows slowed to 400,000 barrels last week, Baird said, adding that if that rate continues through September, monthly outflows would fall under two million barrels or almost one-ninth of August's level, which could cause prices to rise.
According to Baird, time is running out for the US Strategic Petroleum Reserve. 'Can we continue to draw and rely on them for a couple of months? Probably. But six more months? We're going to have to do something else. We can't just rely on inventories at that point,' Baird has reportedly said.
Demand Destruction Across Emerging Markets, China
The second major factor that could influence near-term oil prices is falling oil consumption in China and emerging markets.
Baird estimates demand has declined by roughly four million to six million barrels a day. Higher fuel prices, combined with China's rapid electrification and an affordability crisis, have contributed to the reduction, according to the commodities trader.
However, he has concerns about how permanent those cuts will be.
Businesses and consumers may have delayed travel, shipping, and other oil-intensive activities because they expected the conflict to be temporary. If those activities resume, some of the lost demand could eventually return to the market.
China's Dynamic Oil Purchases
China is the largest oil importer, and its buying activity could also prove critical for future price estimates.
According to Baird, Chinese Middle Eastern oil purchases fell from around 14 million barrels a day before the conflict began to roughly 7 million barrels a day by July. The resulting reduction in demand helped ease pressure on global supplies.
China has since restored around half of that lost purchasing activity. Baird said he will be watching import data closely, particularly as disruption to regional infrastructure, like Saudi Arabia's East-West pipeline, threatens further supply constraints.
A sustained increase in Chinese buying could remove another important buffer from the market. In all, Baird believes that China will take what is available from the Middle East, but will not venture out and bid in other markets. His 'hunch' is that China could slow down its oil purchases again in the near future.
How the Oil Market Responds
Baird's final factor influencing oil prices is the market's ability to adapt. He cautioned against assuming that supply disruptions will automatically produce an uncontrollable oil-price spiral.
Higher prices can create powerful incentives for producers, refiners, and governments to find alternative ways to move and process crude. Diesel markets demonstrate that dynamic, given that refining margins have surged dramatically as blockades and attacks continue to disrupt supplies.
For refiners still operating, the economics could provide a strong incentive to maximise production.
The central question for oil markets, therefore, may not simply be how much supply has been disrupted, but how long inventories can absorb the shock, whether demand rebounds as expected, and how quickly market participants find alternative ways to keep fuel flowing.
