Iran Escalations Will Likely Wipe Out Recent Decline in Gas Prices

June 21, 2019

Escalating tensions with Iran ⁠— as well as a major explosion at a Philadelphia refinery ⁠— are contributing to higher oil prices Friday, threatening the lower gas prices recently seen at America’s gas stations.

West Texas Immediate futures jumped to more than $57 a barrel, up $6 from last week’s low of $51. Brent crude oil prices, the benchmark used in the United Kingdom, are now nearing $65 a barrel.

Friday morning, President Donald Trump said that he had planned to strike Iran, but halted the attack just minutes before it was set to begin.

“We were cocked & loaded to retaliate last night on 3 different sights when I asked, how many will die. 150 people, sir, was the answer from a General. 10 minutes before the strike I stopped it, not [...] proportionate to shooting down an unmanned drone,” the president tweeted.

That move came after Iran shot down a U.S. drone in the Middle East early Thursday morning. While Iranian officials say that the drone was flying over their territory, the U.S. maintains that the unmanned drone was in international waters over the Strait of Hormuz.

That waterway is a critical route for the transport of oil, moving 30 percent of crude oil shipped by sea every year, according to the U.S. Energy Information Administration. About 20 percent of global oil demands pass through the strait every day, and 80 percent of that ultimately travels to Asian markets.

“This is particularly troublesome, especially since it’s come out of left field in the last few weeks,” said Patrick DeHaan, the head of petroleum analysis at Gas Buddy.

Over the past month, gas prices have dropped in response to falling oil prices, but DeHaan says that ongoing escalations with Iran will likely break that decline.

“With Iran shooting down a U.S. drone, oil prices reacted vigorously, and gas prices did as well,” DeHaan said. “I think that now that the situation has escalated from the tanker attacks, it’s more likely that gas prices in most areas would wrap up any remaining declines in the next few days. I think we will start to see the national average begin to move slightly higher.”

“There won’t be an impending, overnight spike, but I think this will be a gradual stop of the decline, and we probably will see a bit of a rebound,” he added.

Just last week, two oil tankers in the strait were attacked. Iran denied involvement in the attack, but U.S. officials have pointed to video evidence ー as well intelligence, the weapons used, the level of expertise required to commit the attack, and recent similar Iranian attacks against shipping vessels ー to bolster their claim that Tehran was responsible.

While the U.S. does not purchase oil from Iran, ongoing tensions could further implicate key American allies that for a time had been given the go-ahead to buy from the Islamic Republic.

After backing out of the Iran Deal secured by his predecessor President Barack Obama, Trump granted sanction waivers to countries including China, South Korea, India, and Japan. However, Trump halted those exemptions last month.

At the end of April, India, the world’s third-largest importer of oil, stopped purchasing Iranian oil. Now the country may need to turn to Russia to meet its gas needs. In June, South Korea had also stopped buying oil from Iran.

“This is where the trade battle with China is particularly interesting. Will China abide by U.S. sanctions? Probably not,” said DeHaan. “Now, if Iran is trying to export oil to China, we’ve seen some interesting tactics, including the transfer of the oil by sea.”

“None of this is good news,” he added. “We’re kind of in this tit-for-tat situation.”

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