Kiplinger Energy Outlook: Escalation in Middle East Gives Oil Prices a Boost
Drivers who had been enjoying falling gasoline prices will soon be paying a bit more at the pump.
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Drivers should prepare to see modestly higher gasoline prices soon. While prices at the pump have been falling steadily this summer, that trend is about to reverse. Mounting tension in the Middle East has pushed crude oil prices substantially higher, and that will trickle through to the gas pump in the coming days. The national average price of regular unleaded is now at $3.18 per gallon, which is 60 cents cheaper than a year ago at this time. A major price spike is unlikely unless full-blown war breaks out between Israel and Iran. But look for the national average price to rise toward $3.30 over the next week or so. If the situation in the Middle East calms, then gas prices should resume their downward trend, and could near $3 per gallon by Thanksgiving. Diesel, now averaging $3.57 per gallon, is also likely to tick up a bit soon, but should remain much cheaper than it was at this time last year.
Oil markets are clearly nervous about the widening conflict between Israel, Hezbollah and Iran. Benchmark West Texas Intermediate crude has risen from a recent low near $66 per barrel to almost $75 today. That likely reflects concerns that Israel could strike Iran’s oil export facilities and cut off a meaningful portion of the world’s daily oil supply. In a worst-case scenario, Iran could retaliate by closing the Strait of Hormuz to oil tanker traffic, which would severely crimp the region’s oil exports. Roughly a fifth of the oil that the world consumes passes through the narrow waterway as it transits from the Persian Gulf to world markets. How realistic these possibilities are is impossible to say, but in the worst-case scenario, oil prices could jump to well over $100 per barrel. On the other hand, if oil exports from Iran or the Persian Gulf are not affected, look for WTI to pull back a bit, to $70 per barrel or slightly lower.
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Lost amid the focus on oil markets, U.S. natural gas prices are quietly rallying from extremely low levels. The benchmark gas futures contract recently traded at $2.86 per million British thermal units, after spending much of the summer below the $2-per-MMBtu level. Gas is still cheap, but no longer dirt cheap. And it could tick higher still, if a cold snap this autumn spurs demand for heating. Currently, there is plenty of gas in underground storage, but those stockpiles are not as large as they were this summer. Some sustained cold weather could whittle them down to below-average levels, and push gas prices higher. If the weather is normal this season, we look for gas to hover near $3 per MMBtu, which should keep most residential customers’ heating bills from rising much, compared with last winter.
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Jim joined Kiplinger in December 2010, covering energy and commodities markets, autos, environment and sports business for The Kiplinger Letter. He is now the managing editor of The Kiplinger Letter and The Kiplinger Tax Letter. He also frequently appears on radio and podcasts to discuss the outlook for gasoline prices and new car technologies. Prior to joining Kiplinger, he covered federal grant funding and congressional appropriations for Thompson Publishing Group, writing for a range of print and online publications. He holds a BA in history from the University of Rochester.
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