Value context and insight. lkm@koreatimes.co.kr
Oil prices fluctuate on Red Sea conflict, improving US economy
By Lee Kyung-min
Global oil prices are undergoing wild fluctuations, influenced by supply disruption concerns due to an escalating conflict in the Red Sea as well as rising demand from the stronger-than-expected growth of the U.S. economy and China’s economic stimulus packages.
Some say the rise in key commodity prices will be sustained for a while since heightened geopolitical uncertainties will not see a major breakthrough anytime soon. Others say any further rise will be limited by concerns of tightening demand in the U.S. and China, long bogged down by the elevated prices of goods and services as well as borrowing costs. They say demand-side factors will not be able to offset short-term hikes prompted by supply disruptions.
The escalating Red Sea conflict is a major cause for concern since a full-fledged oil shock would cripple Korea’s energy supply. Korea relies on imports for over 93 percent of its energy needs. A total of 72 percent of Korea’s crude oil imports come from the Red Sea, a key global logistics hub where 10 percent of internationally traveling maritime containers pass.
Figures
Data from ICE Futures based in London showed that Brent crude oil soared to an intraday high of $84.16 (111,720 won) per barrel, Jan. 28 (local time), the highest since reaching $85.18 last Nov. 6.
West Texas Intermediate (WTI) crude oil for March delivery soared to an intraday high of $78.26 per barrel, Jan. 26, the highest since $80.80 on Nov. 6.
Propelling the days of upward movements was a Jan. 28 drone attack whereby three U.S. soldiers were killed and at least 34 others were injured in Jordan.
U.S. President Joe Biden blamed Iran-backed militias. “We lost three brave souls in an attack on one of our bases. We shall respond,” he said the following day.
Many expected a full-on U.S. military intervention since the drone strike was the first incident resulting in the death of U.S. soldiers in the four-month dispute between Israel and Hamas.
The oil prices moved in the range of between $73 and $74 in December the same year, driven by stable supply from the U.S. and tightening demand due to China’s economic slowdown.
The prices have surged for a month after Yemen’s Houthi launched an attack on vessels traversing through the Red Sea. Brent crude spiked 9 percent this month, and WTI jumped 9.7 percent.
The surge in the oil prices is explained in part by U.S. GDP growth in the fourth quarter of last year registering a robust 3.3 percent, exceeding market expectations of 2 percent.
Also at play are expectations of rising demand led by the Chinese government's stimulus package, coupled with the country’s central bank slashing key rates by 50 basis points.
Global investment banks say the Red Sea crisis translated to up to a $3 per barrel increase in risk premiums and that the prices would soar over 20 percent, if the conflict extends over a month.
KB Securities researcher Oh Jae-young said that the oil prices are likely to remain elevated in the near term, due to a combination of China’s economic recovery and Red Sea woes. However, the ceiling for a further hike will be limited, since the strength of the recovery will undershoot last year’s performance.
“The prices may inch up to the high-80s level, but will more likely plateau to the low-80s range in the first quarter."