Oil futures are plunging – but it could still take weeks or months before gas prices are dramatically lower.
Word of a two-week ceasefire in the war in Iran and a possible reopening of the vital Strait of Hormuz to oil tankers sent crude prices crashing on Tuesday evening into Wednesday. But even if the war ends – which remains to be seen – the massive disruption in global oil markets isn’t over yet.
The average price for a gallon of gas has soared to $4.16 since the start of the war, according to AAA, up by $1.18. Even a relatively small decrease to $4 a gallon could take one or two weeks, according to gas price tracking service GasBuddy.
And getting below $3 a gallon, as gas prices were before the war started on February 27, could take months, analysts told CNN.
“There’s an old expression – gas prices go up like a rocket and come down like a feather,” said Tom Kloza, an independent oil analyst and advisor to major oil company Gulf Oil.
Within 48 hours of the ceasefire deal announcement, retail prices should start to edge down by a few cents each day as wholesale prices fall, Gas Buddy said.
But undoing all the price gains since late February hinges on getting oil flowing through the Strait of Hormuz again, a key waterway through which 20% of the world’s oil usually transits.
“There will be a lot of hesitancy and caution about passing through the strait because it seems that Iran is going to still be policing it,” said Matt Smith of trade analytics firm Kpler. “It will take time to restore confidence.”
Iranian media reported Wednesday that Iran had once again closed the strait following Israeli attacks on Hezbollah in Lebanon, adding to uncertainty about the strait’s status.
But even if the strait completely reopens, it will take time to restore production from oil-exporting nations in the Persian Gulf. Oil infrastructure suffered widespread damage over the last six weeks in countries like United Arab Emirates, Kuwait, Iraq, Oman and Saudi Arabia, the world’s largest oil exporter.
Those Gulf states also slowed or stopped production completely during the fighting since they ran out of storage space.
An estimated 7.5 million barrels per day of crude production from Saudi Arabia, Kuwait, the United Arab Emirates, Qatar and Bahrain collectively shut down in March, according to the US Energy Information Administration.
“The market has been eager to get good news but it remains to be seen if the Strait of Hormuz opens fully,” Bob McNally, founder and president of Rapidan Energy Group, told CNN. “That’s the whole ball of wax and so far Washington and Tehran seem to be talking past each other on that.”
And exporting oil from the region could soon grow more expensive, with both the United States and Iran raising the possibility of charging a toll for vessels to move through the strait.
Tehran in recent weeks charged some shipping companies a reported $2 million fee to guarantee safe passage through the strait. President Donald Trump told ABC news Wednesday that fee could end up being shared by Iran and the United States. Transit fees of $1 million to $2 million per tanker would add roughly $1 per barrel to the cost of oil transported through the strait, according to Neil Shearing, group chief economist at Capital Economics.
Relatively little of the oil that passes through the strait is bound for the United States, the world’s largest oil producer. But oil is a globally traded commodity, and cutting off supply through the strait has roiled markets and raised the price US consumers pay for gas and other petroleum products.
Gas station owners ultimately set the retail price based on what they pay wholesale for gas.
When wholesale prices jump, retailers squeeze their margins to stay competitive, said Jeff Lenard, a spokesperson for the National Association of Convenience Stores. Gas station owners make an average of 15 cents in profit on a gallon of gas.
When wholesale prices fall, owners typically try to make up for that squeeze by hanging onto higher prices, he added.
But all bets are off if the conflict resumes.
“At the moment it’s very uncertain,” said Kpler’s Smith. “There is a huge amount of geopolitical risk still there.”
– CNN’s Hanna Ziady contributed to this report
