Tim’s view
The resumption of tit-for-tat strikes between Iran and the US puts President Donald Trump’s goal to slash retail fuel prices ahead of the midterm elections further out of reach.
US crude prices ticked to a four-week high above $80 per barrel on Tuesday, after Trump said the US would reinstate a blockade on Iran and begin charging its own fees on commercial shipping for safe passage through the Strait of Hormuz — a plan that my colleague Shelby Talcott reported Trump is “very serious” about. The tentative peace deal that came together only a few weeks ago “has effectively collapsed,” Eurasia Group analysts wrote on Monday, adding that they expect the rate of ships traversing the strait to tumble back to just 5-15% of prewar levels, and for crude oil to remain in an elevated range of $75-95 for the foreseeable future.
That’s still much lower than earlier in the war. But for Trump, the more politically salient figure is the price of gasoline, and there the outlook remains fairly bleak. The average US gas price is down about 70 cents per gallon from its wartime peak, but is still about a dollar more expensive than before the war, and rising.
The International Energy Agency warned on Friday that the market for refined petroleum products will continue to tighten, largely for reasons outside Trump’s control. Ukraine’s ongoing string of drone attacks on refineries in Russia has slashed the latter’s refining capacity by 30% and forced Moscow to ban diesel exports. China has also restricted exports, and refineries in the Gulf are still running far below their norm. Altogether, at least 10% of global refining capacity is offline, Bloomberg reported.
Those dynamics pushed the so-called “crack spread” — the gap between crude and product prices — to a record high this month, which should incentivize the remaining refiners to operate at full steam. And when the oil majors report their second-quarter earnings in the coming weeks, it’s a safe bet to expect luscious refining profits — and a correlated string of threatening Truth Social posts about price gouging. Yet those margins will be short-lived if crude prices continue to rise.
With the world’s fossil fuel stockpiles significantly drained, it will take time to subdue retail prices even in the best military circumstances in the strait. And if the war escalates further, there will be fewer buffers available to stave off another big spike.
Notable
- US President Donald Trump had “always wanted” to impose a toll in the Strait of Hormuz, one White House official told Semafor, but allies had tried to talk him out of it.