Fall in oil price may show at the pump - but normality is far off

Oil prices saw a notable decline on Monday, reacting to news of a framework agreement aimed at concluding the war in Iran. Brent crude futures fell approximately 5.3%, settling around $82.7 per barrel. This drop follows a period of volatility where prices had surged, peaking near $120 per barrel after the conflict began, compared to pre-conflict levels of around $70.

Consumers may see lower prices at the pump, but the reduction in gasoline and diesel costs will not mirror the oil price drop. Ilyas Dogru, a consumer economist at the FDM automobile association, explained that taxes account for roughly half of the price at the pump. Therefore, a 10% decrease in oil prices does not translate to a 10% decrease in fuel costs.

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When the oil price falls by, for example, ten percent, it does not mean that fuel prices also fall by ten percent.

Dogru noted that while gasoline and diesel prices fell by 20 øre on Monday, this was due to oil price reductions from the previous week. The impact of the weekend's agreement is expected to be reflected at gas stations on Tuesday. The conflict, which began on February 28th with a U.S. and Israeli attack on Iran, led Iran to restrict shipping through the vital Hormuz Strait, impacting approximately 20% of global oil transit.

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In today, Monday, gasoline and diesel fell by 20 øre, but it was not because of the agreement. It was a fall in the oil price that came last week. So the fall in the oil price we saw over the weekend will probably be reflected at the gas station tomorrow, Tuesday.

Despite the positive news, Dogru cautioned that a full return to pre-war price levels will take time. He cited three main reasons: oil prices remain higher than before the conflict, global oil supply is still constrained due to issues with the Hormuz Strait, and significant infrastructure in the Middle East has been damaged and requires extensive rebuilding. Furthermore, the specifics of the agreement remain unclear, and any potential fees for passage through the strait could ultimately be borne by consumers.

Jan Bylov, an energy strategist at Jyske Bank, echoed these sentiments in an analysis, emphasizing that an open Hormuz Strait is paramount for energy markets. However, uncertainty persists regarding the precise definition of "open" and whether Iran retains specific rights. Consequently, Bylov anticipates a prolonged normalization process, with the bank maintaining a third-quarter forecast of $93 per barrel.

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The most important thing for the energy markets is an open Hormuz Strait.