Strait of Hormuz deal expected to bring some relief at the pump, but prewar gas prices could be elusive

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The tentative U.S.-Iran peace deal is expected to bring some relief for Americans’ at the pump, but even if it holds, prewar gasoline prices could be elusive.

The agreement is expected to increase traffic through the Strait of Hormuz, a key oil shipping lane off Iran’s coast that has been choked off during the conflict. Before the war, about 20 percent of global oil supplies flowed through the strait.

Prices of oil, the main component of gasoline, plummeted over news of the accord. U.S. benchmark WTI was trading at $81 per gallon as of Monday afternoon, down from about $84 per gallon late last week.

The average U.S. gas price, meanwhile, was about $4.07 per gallon on Monday according to AAA, down from about $4.16 per gallon a week prior.

Andy Lipow, president of Lipow Oil Associates, projected that amid the deal’s announcement, gas prices could fall another 10 cents per gallon over the next seven to 10 days.

Tom Kloza, chief oil analyst at Gulf Oil, said he expects oil prices to drop down quickly to about $3.75 per gallon.

Overall, however, several analysts told The Hill they expect to see elevated prices this summer and into the fall.

“Through the summer we’re probably going to have a higher price environment than we saw last summer, just on the back of the fact that we still need to get that crude out,” said Isabelle Gilks, principal analyst for retail fuels at Wood Mackenzie.

Gilks noted that it would take time to “get insurance to be happy to get ships back into the region, to make sure that there’s no mines, to get safe passage assumed, to then … move the ships from where they are to where they need to be.”

She said it could take until the end of August for traffic to be “normalized.”

Lipow also noted that once ships can safely pass, countries including Saudi Arabia, Kuwait and Iraq will then ramp up their oil production.

He projected that “some semblance of normalcy” for gas prices could be four to six months away.

“Six months down the road, of course I think we’ll see some continued declines in oil prices. I think gasoline prices could continue to come off another 10 to 20 cents a gallon, but there is going to be a geopolitical risk premium put into the price of crude oil, given all of this conflict that we’ve seen and uncertainty going forward,” Lipow said.

He added that ongoing risks include Iran’s demonstrated ability to close the strait, as well as potential violence between Israel and Hezbollah.

The national average gas price reached as high as $4.56 per gallon last month as the war raged on. It put significant political pressure on the Trump administration ahead of the midterms as Americans expressed dissatisfaction.

Even if the peace holds and the strait remains open, many analysts say that prices may still be elevated when the midterms roll around.

Kloza projected that around the election, prices could be between $3.50 and $4 per gallon.

“Whereas in most years you can guarantee that you’re going to drop in the last 120 days of the year — or the 30 or 60 days before the midterms — I think this year might be a little different, as far as that goes because I think the body blows that were rendered to crude [oil] and rendered to worldwide refining may have an impact,” he said.

“This drop … that probably takes us from Memorial Day to July 3 in total — is going to be a drop of about 75 cents a gallon. You would ordinarily see it between Labor Day and the midterms, but I think I think they’re going to have more sticky and stubborn high prices,” he said.

Kloza added that pre-war prices are unlikely this year unless there’s a recession.

Lipow projected, meanwhile, that around the midterms, he believes prices would be around $3.30 to $3.60 per gallon.

He said that pre-war prices may not return for “some time” because of geopolitical risks.

Mohith Velamala, oil and gas specialist at BloombergNEF, took a more optimistic view. He said that pre-war prices could resume as soon as July or August if the levels of oil moving through the Strait of Hormuz recover.

“We’ve seen good supply growth, even right now, outside of the Middle East,” Velamala said.

He added that if Mideast production recovers “I think we can see all of this translate to lower gas prices at the pump, and it’s not unreasonable to assume it will go back to pre-war levels.”

He described the war as a “short-term disruption” to a broader macroeconomic market suited to lower prices.

Meanwhile, another factor that could raise demand is countries including the U.S. seeking to replenish their diminished oil stores.

Federal data released Monday indicate that the U.S.’s Strategic Petroleum Reserve was at its lowest level since 1983.

“The strategic petroleum reserves that have been drawn down are going to create demand in the future as they’re replenished,” Lipow said.

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