(By Oil & Gas 360) – The oil market has spent the past several weeks trading optimism. Prices have retreated from their crisis highs as investors bet that diplomacy, ceasefire extensions, and negotiations between Washington and Tehran will eventually restore flows through the Strait of Hormuz.Yet a growing number of traders, analysts, and industry executives are warning that markets may be focusing too heavily on headlines while underestimating the physical realities developing underneath.That concern was reinforced this week when Tom Baker, managing director for Bahrain at global commodities trader Vitol, warned that oil markets may be underpricing the risks associated with the ongoing Iran conflict. According to Baker, the real challenge may not be crude production itself, but the growing shortage of refined products and the inability of the physical system to recover quickly enough if disruptions continue.His warning comes as evidence continues to mount that the global energy system is becoming increasingly strained. Iran’s effective restrictions on Hormuz traffic, infrastructure damage across the region, and interruptions to refining and export facilities have already removed substantial volumes from the market.Vitol estimates that roughly 14 million barrels per day of Middle Eastern supply have been impacted, creating what some market participants describe as the largest supply disruption in modern oil market history.The market response has been surprisingly restrained, after briefly surging above $120 per barrel during the early stages of the crisis, Brent crude has settled back into the mid-$90 range as traders increasingly bet on eventual normalization.Yet that optimism appears increasingly disconnected from conditions in physical markets, where inventories continue declining and refiners remain cautious about securing future supply.The disconnect is becoming more apparent in product markets. Refining disruptions, transportation constraints, and reduced feedstock availability have tightened supplies of diesel, jet fuel, and other refined products more quickly than crude itself.Industry participants are increasingly warning that the next phase of the crisis may not be defined by crude shortages, but by shortages of usable fuels. Vitol’s Baker suggested the real turning point may arrive when buyers enter the market looking for physical barrels and discover they are simply not available.Meanwhile, fresh geopolitical developments continue to challenge the market’s assumption that a resolution is near.Oil prices jumped again after reports that Iran suspended communications with the United States regarding negotiations tied to ceasefire extensions and the reopening of Hormuz shipping lanes. The move raised new doubts about the likelihood of a near-term agreement and reinforced concerns that the conflict could continue well into the second half of the year.The implications extend beyond energy prices alone as supply chain disruptions are beginning to appear across multiple sectors, while higher energy costs are contributing to inflationary pressure in major economies.Manufacturing input costs in Europe have already experienced their sharpest increase in years as companies absorb higher transportation and energy expenses linked to the conflict.At the same time, discussions are emerging around potential policy responses should conditions worsen further.Analysts at Barclays have noted that concerns about energy security could eventually lead to renewed discussions around export restrictions and other emergency market interventions if shortages intensify. While most observers view a U.S. crude export ban as unlikely, the fact that such conversations are resurfacing illustrates how dramatically the market environment has changed.The broader concern is that markets may be underestimating the cumulative impact of sustained disruption.According to industry estimates, global oil demand has already fallen by several million barrels per day as higher prices and shortages force adjustments across Asia and parts of Africa. Yet supply losses continue to exceed demand destruction, leaving inventories to absorb the difference. Vitol and other market participants warn that inventory drawdowns cannot continue indefinitely.This is where HSBC’s warning of a potential “super-squeeze” becomes increasingly relevant.The term reflects a market condition where inventories, spare capacity, and alternative supply sources become simultaneously constrained. In that environment, relatively small disruptions can trigger disproportionately large price movements because there is little buffer remaining in the system.The oil market has experienced supply shocks before; what makes the current situation different is the combination of geopolitical disruption, tightening inventories, damaged infrastructure, constrained refining capacity, and uncertainty surrounding the world’s most important energy corridor.Each factor alone would be manageable but together, they create a system with far less flexibility than many investors appear to assume.For now, markets remain focused on negotiations and potential diplomatic breakthroughs; but the physical market continues sending a different signal.Inventories are falling, refiners remain cautious, shipping remains disrupted, product markets are tightening, and each additional week of uncertainty increases the likelihood that shortages become a physical problem rather than simply a pricing story.The world still produces enough oil but can enough of it continue reaching consumers efficiently if the conflict drags on. That distinction may determine whether today’s volatility becomes tomorrow’s supply squeeze.About Oil & Gas 360 Oil & Gas 360 is an energy-focused news and market intelligence platform delivering analysis, industry developments, and capital markets coverage across the global oil and gas sector. The publication provides timely insight for executives, investors, and energy professionals. Disclaimer This opinion article is provided for informational purposes only and does not constitute investment, legal, or financial advice. The views expressed are based on publicly available information and market conditions at the time of publication and are subject to change without notice.