Good news: Oil traders are betting the Iran war will end soon. The bad news: They also bet the economic damage from the war could last for years.
Crude has soared above $110 a barrel, making $4-a-gallon gas and $5.40 diesel a painful reality in the United States.
But when we say “crude is trading over $110 a barrel,” that’s not the whole story: Oil trades in a market where investors buy barrels of oil for future delivery — months or years later. Now, oil for April shipping is $110, but as the oil goes on for delivery, it gets cheaper.
That is atypical; Oil is usually more expensive the longer it is transported. And that tells us something important: Markets are expecting a big drop in crude prices in the next few months, but oil won’t return to its pre-war levels for years.
In other words, even if the war ends tomorrow, the fall will be with us for some time. Get used to high energy prices.
Currently, oil for May delivery is trading below $110. June oil is $100. It enters the $80s in August and returns to the high $70s in March 2027. Oil is expected to return to $70 a barrel in 2031.
That doesn’t mean that’s exactly what the oil will cost; that’s the money oil traders make on futures. But it’s a sign that no one thinks a pre-war “normal” can be achieved anytime soon.
Rob Haworth, senior director of investment strategy at US Bank, said: “That’s the most difficult economy you can imagine. That’s going to be a real burden on the consumer.
Oil will not go back below $70 for several reasons.
The closed Strait of Hormuz left no place for local producers to put their oil, so many were forced to shut down production. If the strait were to be reopened, production could take weeks to come back online – it’s not like flipping a switch.
Assuming the equipment even works at all: Iran and Israel have caused significant damage to natural gas facilities and oil refineries in the Middle East. Qatar has said that its Ras Laffan natural gas terminal – the world’s largest – will take years to fully come back online.
That is why it will probably be three to four months after hostilities end in the Middle East before oil and gas production approaches anything close to pre-war production levels.
“There’s a lot of oil in the world, it’s just been tapped,” said Rob Thummel, senior portfolio manager at Tortoise Capital.
High gas prices represent a real burden on Americans. But it could be worse.
Macquarie Research analysts on Monday predicted that the war lasting until June could push oil to hit $200 a barrel, which could be linked to gas prices of about $7 a gallon. It’s not their core issue – but it’s within the realm of possibility.
In that situation, most Americans will not be able to live their lives without making major changes. Some will not be able to go to work. Some will not be able to eat. Some will have to give up their homes. And businesses, many of which have stopped hiring, may need to downsize.
But oil would not need to reach $200 a barrel in June to derail the US economy. Heather Long, chief economist at Navy Federal Credit Union, believes another month of triple-digit oil prices would be enough. Joe Brusuelas, chief economist at RSM US, said US oil would need to rise to $125 a barrel – about $25 higher than today – to deepen the economy.
The longer the war goes on, the longer this world’s largest oil crisis lasts. Every hour the war continues raises the risk of economic collapse.
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