Why Fuel and Food Prices May Take Months to Return to Normal Levels

A two-week ceasefire agreement with Iran has triggered rallies in global stock markets and a sharp decline in crude oil prices. However, analysts warn that optimism regarding the impact on consumer finances remains limited, with concerns that significant long-term damage to supply chains has already been initiated.

Over the past month, vessels transporting oil, liquefied natural gas and fertiliser have been effectively prevented from passing through the Strait of Hormuz, whilst substantial damage to Gulf facilities has brought production to a standstill. Analysts estimate that even if the ceasefire remains intact and a peace agreement is reached within the designated timeframe, restarting production and restoring normal supply levels will require several months.

Despite the recent plunge in crude oil prices, the cost remains elevated compared to pre-conflict levels. Simon Williams, head of policy at the RAC, cautions that drivers should not anticipate significant reductions at the pump in the immediate term. He notes considerable uncertainty remains for motorists, with the most favourable outcome being a stabilisation of pump prices in the coming days.

Williams suggests that smaller independent forecourts, which purchase oil at current market rates rather than through advance contracts at fixed prices, may prove quicker to pass on reductions to consumers. He emphasises that stability of the ceasefire, freedom of oil shipment movement through the Strait of Hormuz and the longer-term impact on Gulf oil production will be determining factors. A sustained period of lower prices, extending over several weeks, is necessary to achieve meaningful reductions in wholesale fuel costs.

Rachel Winter, from wealth management company Killik and Co, indicates that predicting the timeline for pump price reductions remains challenging. She estimates the process will require at least several weeks, if not several months.

Jet fuel prices currently stand at approximately double their pre-conflict levels. Willie Walsh, chief executive of the International Air Transport Association, states that even with immediate resumption of traffic through the waterway, supply levels will take months to reach required capacities. Passengers should prepare for elevated ticket prices during this period, he advises. Several airlines have already increased fares whilst others have reduced route offerings.

Winter notes that even if jet fuel were able to transit through the strait, refining capacity remains a constraint due to damage sustained by certain facilities. Alan Gelder, senior vice-president of Refining, Chemicals and Oil Markets at energy analysts Wood Mackenzie, explains that normalisation of the entire supply chain is required, with vessels reaching appropriate destinations and refineries resuming operations. He believes this process will take weeks rather than days.

Approximately one third of global fertiliser supplies typically transit through the Strait of Hormuz. Consequently, fertiliser prices have risen sharply in recent weeks. Transportation costs for food across the United Kingdom have increased, whilst farmers face higher expenses for diesel-powered agricultural machinery. Crop growers utilising energy for greenhouse heating will confront additional cost pressures when the energy price cap is reset in July.

The Food and Drink Federation, representing thousands of British manufacturers, states that the ceasefire has not resolved long-term uncertainty. Dr Liliana Danila, chief economist at the organisation, indicates that recovery of supply chains and energy infrastructure in the Gulf region is expected to require between six months and one year.

Manufacturers will continue to experience the impact of supply chain disruptions affecting oil, gas, fertiliser, packaging materials and essential cleaning chemicals, maintaining cost pressures for months ahead. Even if the conflict concludes within the next fortnight, the organisation anticipates that food inflation in the United Kingdom will reach at least nine per cent before year end.

Households covered by the Ofgem energy price cap have thus far been protected from the spike in wholesale energy prices. The cap is scheduled for a three-month reset in July, with the regulatory calculation window now more than halfway complete. Analysts have anticipated a substantial increase at this juncture. The government has pledged support based on household income, although indications suggest this may not materialise until autumn.

Dr Craig Lowrey, principal consultant at Cornwall Insight, observes that whilst a ceasefire alleviates some immediate pressure on gas markets, it does not eliminate existing challenges. If the strait opens and remains accessible, this will ease prices and be reflected in the July price cap. However, unless prices decline substantially below pre-conflict levels, the wholesale price increases observed through March and early April will still impact consumer bills.

Lars Jensen from Vespucci Maritime suggests that companies will seek assurances regarding safe vessel transit, expressing scepticism that the two-week pause will be sufficient to restore confidence. He anticipates an increase in vessels exiting the region and likely a trickle of vessels entering the Gulf, though these flows will not be of equivalent magnitude.

Beyond movement through the strait, Lowrey highlights that damage to gas infrastructure in Qatar will require years to rebuild, ensuring supply constraints persist. As a result, even with a ceasefire in place, wholesale gas prices are likely to remain elevated for a considerable period, limiting the extent to which the July price cap can decline.