US-Iran talks are progressing, and markets are reacting positively, with US stocks nearing all-time highs and oil futures dropping from $100 a barrel. However, analysts warn that the danger to gas prices is not over yet, and $5 gas is still a possibility this summer, which is why gas costs remain a concern.
Rory Johnston, an oil market researcher, notes that the Strait of Hormuz remains closed, and this is a major point of leverage for Iran.
According to the report, Tehran is reluctant to reopen the strait, as it would lose bargaining power once it does. Johnston said, “Nothing has fundamentally changed. The strait remains closed.”
The market is waiting for proof that the Strait of Hormuz is truly reopening, ideally without tolls or fees that would increase the cost of oil. To solve the supply shock, tanker flows through the strait need to return to pre-war levels.
Bob McNally, founder of Rapidan Energy Group, expressed skepticism about the reopening of the strait, saying, “I’m skeptical. I’ll believe it when I see it.”
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They share this skepticism, including Sultan Al Jaber, the CEO of ADNOC, who said it would take at least four months to get back to 80% of pre-conflict flows through the strait.
Full recovery to pre-war flows is unlikely until the first half of 2027, according to Al Jaber. Additionally, there’s uncertainty about whether the ceasefire will hold, with US forces conducting “self-defense strikes” targeting Iranian missile launch sites and boats around the Strait of Hormuz.
Brent crude oil futures jumped 4% on Tuesday, giving back some of Monday’s major selloff, as tensions remain high in the Gulf. The strikes were aimed at boats attempting to place mines, highlighting the fragile nature of the ceasefire and the dangers facing vessels transiting the waterway.
Even in a best-case scenario, serious damage to the world energy system has already been done, with over 1.2 billion barrels of oil derailed by the war, according to the report.
This number rises each day the Strait of Hormuz remains largely closed. Not only is supply down, but energy demand is rising due to the start of summer driving season, which may lead to higher gas costs for consumers.
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McNally expects Brent crude oil futures will return to $120 or even $130 a barrel, and US gas prices will flirt with the all-time high of $5.02 a gallon set in June 2022. Gas prices have leveled out around $4.50 a gallon in recent weeks.
Johnston said that if the Strait of Hormuz remains closed for the next month, gas prices will likely break those record highs. However, if it reopens, the market will get an immediate relief selloff, but it will still take months to normalize flows out of the strait.
JPMorgan expects that even after the Strait of Hormuz reopens, Brent crude will average $104 a barrel in the third quarter and $98 in the fourth quarter of this year. The company’s managing director, Kevin Book, said that while the strait can be de-mined and ships can be evacuated within weeks or months of a deal, it will take longer to repair damaged facilities and fully restore production.
According to the outlet, Book said, “I don’t think anybody is expecting to return to averaging $60-a-barrel oil anytime soon. It will take a while for supply to come back on stream.”
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