The Long Road Back to Normal

Greetings, Utah Energy United!  As of this writing, the Strait of Hormuz is open. Probably. Maybe!  Sorry, we’re not trying to be glib or cute here, but the public messaging of the President of the United States is often changing, frequently self-contradictory, and seems deliberately at-odds with publicly available reporting. That creates a whipsaw effect that leads us all not to know where things actually stand. But for the sake of this e-blast, let’s say the Strait of Hormuz is back open. So, what’s that mean for gas prices?  Here’s a headline from The Guardian from earlier this week: “Oil and gas unlikely to return to prewar prices for months even if Hormuz reopens.” Ok, then! But why? For one thing:  For Iran, a gradual reopening “is tactically preferable”, too, according to [Bjarne] Schieldrop, [the chief commodities analyst at SEBSchieldrop] in preventing global governments from restocking their crude stores too quickly and allowing Tehran to maintain its political leverage through its negotiations with the US.  For another:  Market observers believe it could be late July before minesweepers can assure mainstream shipping companies, and their insurers, that the trade route that once carried a fifth of the world’s oil and gas is clear to play a role in the Gulf’s long journey back to pre-crisis exports.  And for yet another:  “Even if ships now have safe passage, tankers are in the wrong place, oil production and refining facilities need to get up to full capacity, and questions over the cost and availability of insurance for ships traversing the strait will remain,” according to Neil Shearing, the chief economist at Capital Economics.  About 80% of crude flows could resume by the end of the third quarter, Shearing said, but exports of gas could take longer because of the damage from Iranian drone strikes on Qatar’s gas processing facilities during the conflict in a blow to countries, including the UK, which are exposed to the economic impact of global gas prices.  There’s an old saying that “gasoline prices rise like a rocket and fall like a feather” meaning that when crude oil prices fall, retail prices tend to decline more slowly because of inventory, competition, and pricing dynamics. Recent reporting noted that crude prices fell sharply after ceasefire news, while gasoline prices barely moved.  As we wrote in this space last month, “Inventories in the US Strategic Petroleum Reserve (SPR) continue to draw down to alleviate the pressure on prices. For week ending April 24, 7.1 million barrels left the SPR, bringing the new total to 397.9 million barrels. This is 327.6 million barrels shy of maximum capacity.”  That has continued and inventories for the week ending June 12, show another 8.9 million barrels left the SPR, bringing the new total to 340.3 million barrels—lower than the 2023 low reached during the Biden Administration’s huge drawdown and the lowest level since 1983. SPR inventories are now 385 million barrels shy of maximum capacity. Even after the strait reopens, some of the supply may go toward rebuilding inventories, further delaying an immediate lowering of fuel prices.  The bottom line is that this disruption has had ripple effects far and wide that will take a long time to return to normal. It’s also important to note that the upstream oil and gas industry – particularly in Utah – is comprised primarily of smaller, independent producers. According to the Independent Petroleum Association of America, “America’s independent producers operate 95 percent of the nation’s oil and natural gas wells, and are responsible for 85 percent of US oil production and 90 percent of natural gas production onshore. It takes many, many hands working independently of one another, but together as an industry, to respond to a disruption of this size. What was once thought of as “normal” is still a long way off.  To read the entire piece from The Guardian, click here.  Thank you for your continued engagement with Utah Energy United. Happy Friday!  Be sure to follow us on X, Facebook, and LinkedIn. And if you know someone who should be a part of Utah Energy United, get them to sign up here.   Rikki Hrenko-Browning President Utah Petroleum Association 6905 S. 1300 E. #288 Cottonwood Heights, UT 84047 (435) 219-0963 rhrenko-browning@utahpetroleum.org