Retail gasoline prices will move up in the short-term, says OPIS' chief oil analyst

Key Concepts

• WTI Crude Oil: West Texas Intermediate, a benchmark for oil prices in the US.
• Short Covering: Buying back borrowed securities or commodities to close out a short position, often driving prices up.
• Open Interest: The total number of outstanding contracts of a derivative (like oil futures) that have not been settled.
• OPEC: Organization of the Petroleum Exporting Countries.
• Strait of Hormuz: A narrow waterway between Iran and Oman, a critical route for oil shipments.
• US Shale Production: Oil production from shale rock formations in the United States.
• IEA: International Energy Agency.
• GDP: Gross Domestic Product, a measure of a country's economic output.
• Suez Canal: An artificial sea-level waterway in Egypt, connecting the Mediterranean Sea and the Red Sea.

1. Immediate Oil Price Reaction to Iran-Israel Conflict

• Initial Spike: WTI crude oil hit its highest level since January following Iran's retaliatory attacks on Israel.
• Short Covering: The initial price surge was largely attributed to short covering, as money managers held significant short positions. The rule of thumb used was that when open interest goes down, prices go up, indicating short covering.
• Market Trend: The oil market was already trending higher before the attacks, and the geopolitical event "supercharged" the price increase.

2. Scenario: Freeze in Conflict & Impact on Oil Prices

• No Infrastructure Damage: The attacks did not damage any oil infrastructure, and the Strait of Hormuz remained open.
• Supply Unaffected: Oil supply was not impacted, with OPEC continuing to bring barrels to the market. US production remained above 13 million barrels per day despite a decrease in rigs.
• Price Cooling: If the situation freezes, prices are expected to cool off. WTI reached as high as $77.62 but then decreased by $4. The initial spike was considered a knee-jerk reaction and driven by short covering.
• Iran's Self-Interest: Iran is unlikely to block the Strait of Hormuz because they also rely on it for their oil exports.

3. US Shale Production Peak

• IEA Assessment: The IEA suggests that US shale production may have peaked, and a contraction is expected in the coming years.
• Rig Count Decline: The decline in rig counts is expected to put downward pressure on US oil production.
• US Still a Major Producer: Even with a pullback, the United States will remain one of the largest oil producers globally.

4. Oil Price Trends and Economic Factors

• Lows for the Year: The analyst believes that the lows for the year have likely been seen, even if the conflict subsides.
• Economic Growth: Oil prices are closely tied to economic growth. Positive developments in US-China negotiations and a positive GDP outlook are supportive factors.
• Inflation: Inflation was previously coming down, but the analyst expects a higher inflation number next month.
• GDP Outlook: Economists are starting to boost their GDP outlook globally.
• Price Ceiling: If the conflict freezes, the analyst suggests that $77.62 for WTI and $78.50 for Brent might be the high for the remainder of 2025.

5. Impact of Strait of Hormuz Closure

• Significant Impact: Closing the Strait of Hormuz would have a significant impact on oil prices.
• Suez Canal Alternative: The Suez Canal is an alternative route, but it can only accommodate smaller ships, increasing shipping costs and transit times.
• Price Lift: Blocking the strait would lead to a lift in prices, but the analyst doesn't believe it would be "incredibly" high.

6. Conclusion

The oil market's immediate reaction to the Iran-Israel conflict was driven by short covering and existing upward trends. If the conflict freezes, prices are expected to cool off due to unaffected supply. While US shale production may have peaked, the US remains a major producer. Economic growth and inflation trends will also influence oil prices. Closing the Strait of Hormuz would significantly impact prices, but alternative routes like the Suez Canal exist, albeit with limitations.