Oil prices rebound, as Middle East remains unstable

Economy

Published: 14 Jan. 2024, 07:00

Oil prices rebound, as Middle East remains unstable

Gasoline prices are shown at a gas station in Seoul on Sunday. [YONHAP]

International oil prices have slightly rebounded following a sharp fall amid renewed conflicts in the Middle East, as Iran seized an oil tanker off the coast of Oman and Britain and the United States carried out military strikes against Houthi targets in Yemen.

West Texas Intermediate (WTI)’s futures rose to $72.02 per barrel on Thursday and finished at $72.68 on Friday (Asia trading hours), while Brent rose to $77.41 on Thursday and $78.29 on Friday.

WTI prices fell by more than four percent on Jan. 8 after Saudi Arabia, the world’s largest oil exporter, slashed its February oil prices in response to competition from rival suppliers and concerns about supply overhang.

The WTI’s futures contract for India-bound shipments in February lost $3.04, or 4.1 percent, to finish at $70.77 per barrel on Monday. This is the largest drop in prices since Nov. 16 last year, when it dropped by 4.9 percent. The Brent futures contract for February also shed $2.64, or 3.35 percent, to settle to $76.12 a barrel.

Saudi Arabia’s national oil company, Saudi Aramco, lowered the official selling price of its Arab Light Crude for Asian customers, which was $2 per barrel from January to $1.50 a barrel over Oman/Dubai quotes on Sunday. This is the lowest level in 27 months since November 2021. The news comes after OPEC+ agreed on Nov. 30 of last year to voluntary cut a combined output of 2.2 million barrels a day for this quarter but failed to fuel an oil price rally.

Crude oil (WTI) prices sharply dropped on Monday but slightly rebounded after conflicts renewed in the Middle East. [AHN DA-YOUNG]

Market analysts see that failure as a sign that Saudi Arabia is struggling to sell all of its crude oil output as competition among oil producing-nations becomes fiercer.

“While it is possible that the price reduction was to maintain market share in the face of production cuts, the market is taking it as a clear sign that the economy is slowing,” said Phil Flynn, senior market analyst at The Price Futures Group.

Geopolitical risks, including the U.S.-China trade conflict and anxieties over the Middle East caused by the Hamas-Israel War, persist, but they have not caused oil price shocks as severe as have occurred in the past. The crude oil supply from regions in the Americas, including the United States, Brazil and Guyana, has been consistent, and has even reached record highs. U.S. oil production in the first week of January 2024 reached 13.2 million barrels per day, while oil and refined oil inventories also increased by more than 10 million barrels.

In addition, global demand has shrunk due to leading oil importer China’s economic slowdown, with reports that China has been seeking fewer Saudi imports.

The decline in oil prices is a good sign for domestic prices.

The average gasoline price at nationwide gas stations was1577.1 won per liter in the first week of this year, from Dec. 31 to Jan. 4, down 5.5 won from the previous week. This marked the 13th consecutive week of falling gasoline prices, according to Opinet, Korea National Oil Corporation’s oil price information website.

Fluctuations in international oil prices are usually reflected in gas stations' selling prices after two weeks. The fall in petroleum prices due to falling oil prices lowers the inflation rate.

But experts say geopolitical risks that could affect prices, such as instability in the Middle East remain, as illustrated by the recent hike in prices over the strike in Yemen on Thursday.

Oil prices also rose slightly in the beginning of the year after Iran-backed Houthi rebels threatened and attacked civilian merchant ships in the Red Sea. Danish shipping company Maersk, the world’s second-largest shipping company, was forced to reroute around South Africa instead of taking its usual maritime route in the Red Sea after militants attacked its Hangzhou container ship.

If Iran blocks the Strait of Hormuz, through which 20 percent of the world’s crude oil is ferried, international oil prices will likely soar.

“If you had a disruption in the Strait of Hormuz for a month, [oil] prices would rise by 20 percent and could even eventually double if the disruption there lasted for longer,” said Daan Struyven, head of Goldman Sachs' oil research division.

“Geopolitical instability in the Middle East will shape the rise in oil prices,” said Lim Hwan-yeol, economist at Shinhan Securities. “Oil prices will likely stay at 65 to 80 dollars per barrel in the first half of the year.”

Another cited variable in oil prices is a potential drop in U.S. production. U.S. crude oil manufacturing is expected to increase by around 300,000 barrels this year compared to last year, according to Washington-based consulting firm Rapidan Energy Group. This is a smaller increase in production than the expansion of one million barrels that the market saw last year.

BY KIM KYUNG-HEE,KIM JU-YEON [kim.juyeon2@joongang.co.kr]