Value context and insight. lkm@koreatimes.co.kr
Korea should brace for oil price volatility
By Lee Kyung-min
Fears growing over export drop, deflation
By Lee Kyung-min
Oil prices will continue to fluctuate due to heightened uncertainty over how the recent conflict between major oil producers will unfold, with the rapid spread of the new coronavirus remaining a major risk crushing demand, analysts said Tuesday.
Oil prices fell over 30 percent March 9, the biggest fall since the 1991 Gulf War. The price shock came as Saudi Arabia slashed its export oil prices over the weekend after Russia refused to agree to further production cuts.
The global oil benchmark Brent crude was at $33.09 (39,500 won) a barrel on Monday (local time), a fall of 27 percent. U.S. crude fell 27 percent to $30.
While Goldman Sachs has warned that the price of oil could tumble further to as low as $20 a barrel, local analysts view such a scenario as unlikely.
“Our baseline scenario is that the price will move between a range of 35 and 45 dollars per barrel,” Meritz Securities chief economist Stephen Lee said.
“The coronavirus will spread but will eventually be contained in a month or two. Although the discord between the oil producers is high, they will not resort to any measure that could further drag down an already low price. Goldman Sachs' outlook has gone a bit far, given 20 dollars per barrel is a scenario only probable if a recession is in full swing.”
Samsung Securities analyst Shim Hye-jin echoed the view, saying the U.S. would not be able to let the current price continue for much longer.
“In February in 2016, the price rebounded after U.S. manufacturing costs did not bear the low price. As for the Goldman Sachs projection, I believe the price would not go any lower than a mid-20 dollar per barrel level,” she said.
Implication for Korea
The oil price plunge will do Korea more harm than good, as Asia's fourth-largest, export-reliant economy will see a marked drop in exports of petrochemical goods, the country's key growth driver alongside the semiconductor industry. In 2019, exports of Korea's petrochemical and oil industry stood at $83.2 billion, while that of semiconductors was $93.9 billion.
The unexpected sharp drop will not translate into a noticeable profit increase for the local airline, shipbuilding, marine and logistics industries, because the loss of demand due to the new coronavirus far outweighs the limited boost in profits led by lower oil price-induced operating cost reductions.
The oil price shock could instead lead to a faster drop in already declining consumer prices, fanning deflation concerns faster than previously thought amid an overall economic slowdown already in progress, which was initiated by the drawn-out U.S.-China trade dispute.
The price shock is a major cause for concern for Korea, whose petrochemical- and oil-related industries account for around 15 percent of total exports.
The bleak outlook in profit margin is due mostly to the oil price drop and subsequent unit price decline of export goods produced by the industry.
“The price shock is all but compounded by the rapid, global spread of the new coronavirus that dampens trade, a major downside risk to the country's export-reliant economy,” Seoul National University economist Ki So-young said.
Statistics Korea's data showed that Korea's headline inflation rose 1.1 percent in February from the year before, while the service industry reported the slowest increase in 20 years due to the new coronavirus.
Many considered this a sign that the consumer price would pick up after failing to break the 1 percent mark for the previous 12 months, mostly due to the supply-side shock triggered by a spike in the price of agricultural produce caused by a summer heat wave.
But February data showed international airfares fell 4.2 percent from a month earlier and overseas travel expenditure 5.8 percent due to a sharp fall in air travel demand due to the coronavirus outbreak.
“January and February are months where the service industry sees a moderate overall jump in consumer prices due to wage hikes and other new year-related changes, and the lower-than-expected price is feared to slide further,” Yonsei University economist Sung Tae-yoon said.
“This is because the demand-side related price drop seems inevitable with the coronavirus outbreak becoming a pandemic developing into a global challenge.”