Kiplinger Energy Outlook: Gas Prices Finally Set to Recede

A hand holding a gasoline hose that is pouring out fuel in the shape of a dollar sign, indicating gas prices.

Kiplinger’s Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or to subscribe for the latest trends and forecasts from our highly experienced Kiplinger Letter team.

It’s been a tough month and a half for drivers. The national average price of regular unleaded rose from $2.98 per gallon at the end of February, when the U.S.-Israeli airstrikes on Iran began, to about $4.15 per gallon a month later. The near-total suspension of energy exports from the Persian Gulf drove up prices of oil and refined fuels around the world. For a time, it appeared that the two sides were stuck in a standoff that would keep oil tankers bottled up in the Persian Gulf for months.

This week brought signs of a possible peace deal. Most significantly, Iran announced that all commercial ships could resume using the Strait of Hormuz, the narrow entrance to the Persian Gulf, provided the cease-fire between Israel and Iran’s proxy group Hezbollah stays in force. That announcement came after the U.S. Navy had begun blocking ships from using Iran’s ports, which threatened to halt Iran’s own oil exports and collapse its economy. The Iranian announcement that commercial ships would be allowed to pass through the Strait of Hormuz sent benchmark West Texas Intermediate crude oil dropping like a rock. After trading near $100 per barrel in recent sessions, WTI fell to $84.

Much is still up in the air right now, but if these early signs of a resolution to the conflict bear fruit, then oil exports should resume from the Persian Gulf soon, bringing badly needed supply to depleted markets in Europe and Asia. The big drop in crude oil futures should also show up at the gas station. The national average price of regular unleaded, which stood at $4.08, should drop below $4 soon, and could near $3.50 later this spring. Diesel, which rose even more than gasoline during the war, could fall from its present average of $5.59 to under $5.

However, don’t expect prices to return to their prewar levels. The interruption of so much oil production in the Middle East will take time to recover from. Much of the region’s energy infrastructure has been damaged during the war. Many oil wells were shut down because countries in the Gulf region had nowhere to store oil that couldn’t be exported by ship. Restarting those wells and repairing damaged facilities such as refineries and export terminals will take weeks or months. And until a durable peace deal is in place, traders will be on guard against any sign that the fighting could resume. So, we look for WTI to trade close to $80 per barrel this spring, versus its prewar level of about $65.

Natural gas futures have been largely unaffected by the conflict, since the U.S. has only limited ability to export gas to regions that have seen supplies of Middle Eastern gas cut off. Gas futures were recently trading near $2.65 per million British thermal units, which is actually a bit lower than the prewar level. Odds are, they’ll stay at or below $3 until any summer heat waves arrive and cause electricity demand to spike.