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After hitting a five-year low earlier this winter, retail gasoline prices are headed higher. The national average price of regular unleaded is back up to $3 per gallon, after bottoming near $2.75 early this year. Motorists can expect to see prices rise in the coming days due to higher crude oil prices stemming from the new conflict in the Middle East. We look for the national average price to hit at least $3.25 in coming weeks. If the U.S.-Israeli air campaign against Iran continues for weeks rather than days and keeps pushing oil higher, average gas prices could near $4. Diesel, which has already risen more than gasoline has, is likely to continue to climb. Now averaging $3.77 per gallon, diesel is likely to surpass $4 soon, and may hit $4.50 if the fighting in the Middle East doesn’t end quickly.
The oil market is clearly worried about potentially large losses of crude exported from the Middle East, especially via tankers that normally pass through the narrow Strait of Hormuz, which links the Persian Gulf to the Arabian Sea and the global market. About a fifth of the world’s oil supply transits this narrow waterway each day. Now, the strait appears to be effectively closed as vessel owners avoid the ongoing conflict in Iran. The Iranian regime could target any tankers that do attempt to transit the strait, just miles from Iran’s coastline. A brief closure should not cause a major surge in oil prices. But if tanker traffic remains shut down for weeks, the loss of supply and the resulting price spike will be significant. Benchmark West Texas Intermediate oil initially rose about 8% when trading opened early Monday, March 2. Now at $72 per barrel, WTI could surpass $80 and even threaten $100 if exports from the Persian Gulf remain off the market for an extended period.
U.S. natural gas prices are showing a more muted response to the situation in Iran, since the United States is a major gas exporter. Benchmark gas futures contracts rose about 3%, but remain cheap at about $3 per million British thermal units. Weather matters far more to natural gas prices in the United States than upheaval in the Middle East does. And right now, weather forecasts show much of the eastern U.S. warming up with an early start to spring, which means only modest demand for home heating. However, Europe depends heavily on liquefied natural gas shipped from the Persian Gulf. If those exports remain cut off, European purchases of U.S. LNG could cause prices here to climb later this spring.
