The price of oil took a tumble beginning at the end of October, and the decrease accelerated following the midterm elections in early November.  

Gasoline prices in the U.S. also dropped this week, falling below $4 per gallon for the first time since July. Going into the weekend, the average price for a gallon of gasoline in America was $3.87 per gallon, down from $4.07 per gallon a week ago, according to AAA. 

However, the price remains well above the $3.08 per gallon it was at a year ago, and experts say that an elevated price is likely to continue through 2027. 

Continuing hostilities

Investors are likely betting that diplomacy will help bring about an end to the U.S.-Israeli war with Iran, but hostilities continue in some parts of the Middle East. 

Iran’s military claimed Thursday to have struck four oil tankers that had ignored warnings, Reuters reported, noting the claims couldn’t be verified. 

Yemen’s Iran-backed Houthis said Thursday they attacked a pumping station on the Saudi East-West oil pipeline, which is used as an alternative route around the Strait of Hormuz, the newswire service also reported.

“The ongoing inability of the U.S., Israel, or Saudi Arabia to exert control over the Houthis and contain these attacks remains one of the more suspicious aspects of what is happening in the Middle East today,” David Blackmon, energy analyst, wrote on his “Energy Additions” Subtack. 

The International Energy Agency’s (IEA) November Oil Market Report released on Friday says the global oil supply rose by another 2.3 million barrels per day in October, to 105.4 million barrels per day. 

Bloomberg estimates that exports from the Gulf region, excluding Oman, are about 74% of pre-war levels. 

Blackmon pointed out that continuing improvement from the Gulf is far from certain. When the route around the strait is under attack, the 74% recovery is vulnerable to the next drone strike, whenever that may come, he wrote. 

The U.S.-Israel war with Iran that began in late February resulted in rocket attacks on vessels in the Strait of Hormuz, effectively closing the passageway for a quarter of global seaborne oil trade and significant volumes of liquefied natural gas and fertilizers.
 

Fuel prices to remain high

Patrick De Haan, head of petroleum analysis for GasBuddy, wrote in his “Fuel Insights” Substack that it’s a myth that the outcomes in the midterms had much to do with dropping gasoline prices. 

“Gas prices have fallen in the 30 days leading up to the election every year since 2006 except 2010, and it’s typically seasonal: refiners finish maintenance and ramp up output just as demand fades with cooler weather. Those same forces, along with more oil moving through the Strait of Hormuz, are why prices could stay below $4 in the weeks ahead,” De Haan wrote. 

The U.S. Energy Information Administration (EIA) released its “Short-Term Energy Outlook” this week. 

While the agency expects the retail price of gasoline and diesel to decline in 2027, it raised its forecast from last month’s outlook, to $5.03 per gallon for diesel in 2027, a 12% increase over the previous month’s forecast. Gasoline prices are forecast to average $3.73 per gallon, a 5% increase over the previous month’s forecast. 

“We now assume global petroleum product markets will face continued supply constraints through the end of 2027,” the EIA said. 

Refinery capacity is limited

This will, the EIA says, support a wider petroleum product crack spread, incentivizing elevated U.S. refinery operations. The crack spread is the difference between a barrel of crude oil and the petroleum products refined from it, such as gasoline and diesel. 

Blackmon wrote that U.S. inventories of refined products are 8% below the five-year average. The EIA’s weekly distillate series shows distillate fuel-oil stocks for the first week of November are lower than they’ve been since records began in 1982. 

Besides low inventories, U.S. refineries ran at 95.2% of operable capacity last week. 

“They are running about as hard as they physically can, and the diesel shelves are still the barest in more than 40 years for this point in the season,” Blackmon wrote. 

Emergency stocks will provide temporary relief, but a long-term fix requires more refining capacity. The last major refinery in the U.S. was built in 1976, and even if planning for one started today, it would be several years at least before it was brought online. 

Ultimately, all these factors combined will keep fuel costs above what they were prior to the conflict in Iran for the foreseeable future.