Gas prices may take a hit as storm moves into Gulf of Mexico

Oil prices have hit a six-week high due to geopolitical instability in the Persian Gulf and meteorological instability in the Gulf of Mexico.
Image: A flooded area is seen in New Orleans
A car navigates flooded streets in in New Orleans on July 10, 2019.David Mora / Reuters

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By Martha C. White

Oil prices have hit a six-week high due to geopolitical instability in the Persian Gulf and meteorological instability in the Gulf of Mexico — a clear reminder, analysts say, that the price American drivers pay for gasoline is subject to volatility-induced fluctuations on multiple fronts this summer.

“We have so many near misses,” said John Hall, chairman of U.K.-based Alfa Energy.

In the latest incident, a British naval ship intervened Thursday after a trio of Iranian vessels reportedly tried to block a U.K. oil tanker near the Strait of Hormuz, a critical choke point through which roughly one-third of the world’s oil passes. Analysts say the attempted blockade was in retaliation for the diversion of an Iranian oil tanker suspected to be traveling to Syria in violation of sanctions.

“The Iranians… threatened unspecified consequences if the British government did not release their tanker,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics. Iran maintained that the tanker was destined for Europe, which, if true, would imply a violation of U.S. sanctions against Iran — another complicating hurdle that could delay a resolution.

“The problem with the Iran situation is we don’t know when it’s going to end or how it’s going to end,” Hall said.

Acrimony between the United States and Iran has already contributed to a rise in oil prices this year. Allison Mac, petroleum analyst at GasBuddy, said retail gas prices have been climbing since shortly after Iranian forces shot down a U.S. drone and concern about military retaliation was on the rise.

“We’re looking at real-time retail prices starting on June 23. That’s when we started to see the spike… The market became really unstable,” she said. “The market has not quite recovered since then.”

And the Persian Gulf isn’t the only gulf where trouble is brewing: Oil production in the Gulf of Mexico is operating at a reduced capacity in anticipation of a building weather system that meteorologists are predicting could become the first named hurricane of the season to make landfall in the U.S. strengthens.

Although current weather forecasts are calling for a weaker storm that would sideline production for less than a week, the Gulf’s key role makes it uniquely vulnerable during the Atlantic hurricane season. As American oil production has increased, the Gulf of Mexico has become an increasingly important nexus for importers, exporters and refiners.

“The additional complication is that the Gulf of Mexico and the sea lanes and everything in that crescent is much busier in terms of the movement of cargo,” said Tom Kloza, global head of energy analysis for the Oil Price Information Service.

The National Hurricane Center warned, “Storm surge, heavy rains, and hurricane conditions are possible across the North-Central Gulf Coast in a couple of days.”

“Prices will go up if it does damage refineries,” Mac said. “Typically speaking, it probably goes up five to 10 cents a gallon,” she said, if a storm is strong enough to damage refineries or cause widespread power outages — two key ingredients to the kind of price-impacting shutdown drivers experienced two years ago when Hurricane Harvey struck the Houston area.

“The one thing Harvey taught us is you can have a hurricane that’s largely a rain event [and] you can have a lot of impact from flooding as opposed to just purely wind and storm surge,” Kloza said.