Anxious 'International Oil Prices'... Further Increase Could Shake the Current Account Balance

The Bank of Korea Forecasts International Oil Prices at $85 in the Second Half
Recent Uptrend Continues, Surpassing Projections
Production Cuts by Oil-Producing Countries and Increased Demand from the US Expected
Rising Oil Prices Negatively Impact Current Account and Inflation

South Korea's current account balance recorded a surplus for two consecutive months, but recent international oil prices have been rising again, raising significant uncertainty. South Korea's current account is barely in surplus as exports continue to decline while imports decrease even more. In this situation, a sharp rise in oil prices could increase import burdens, negatively impacting the current account balance, inflation, and the overall economy.

According to the Bank of Korea and major foreign media on the 8th, recent international oil prices are acting as a trigger for domestic and global economic conditions. Brent crude, the international oil price benchmark, is currently at its highest level in about three months. Brent crude, which fell to $72.5 per barrel in early May, fluctuated in the mid-to-high $70 range before starting to rise at the end of June, now reaching around $86 per barrel. West Texas Intermediate (WTI) crude oil in the U.S. has also surpassed $80 per barrel.

Compared to last year, when prices soared to $120 per barrel due to the Ukraine war, the current level is still low, but many analyses suggest the recent upward trend is significant. This is because the Ukraine war is showing signs of escalation, and major oil-producing countries continue to implement production cuts. In particular, as concerns about economic recession in the U.S. and Eurozone have eased recently, there is growing anticipation that oil demand will increase and prices will rise further.

The current account recorded surpluses for two consecutive months in May ($1.93 billion) and June ($5.87 billion), largely due to the normalization of international oil prices this year after last year's surge, which reduced import costs. In fact, as of June, exports decreased by $5.55 billion compared to the same month last year, while imports decreased even more, by $5.69 billion.

The Bank of Korea explained the decrease in imports by stating, "Although imports of consumer goods increased, the decline in energy import prices led to a reduction mainly in raw materials." The Ministry of Trade, Industry and Energy announced on the 1st that the trade balance for July was $1.63 billion, but with exports declining for ten consecutive months and imports decreasing further due to falling international oil prices, many point out this is a 'recession-type surplus.'

Global investment banks (IBs) have already raised their forecasts for international oil prices. Soci?t? G?n?rale (SG) predicted Brent crude could reach $100 per barrel next year, while Standard Chartered forecasted $98. Even if international oil prices do not reach $100 per barrel, if the current upward trend continues, it could raise import prices and negatively affect the South Korean economy.

In its revised economic outlook in May, the Bank of Korea projected that international oil prices (Brent crude) would average around $85 per barrel in the second half of this year. With prices already exceeding $85, even a rise to the $90 range could damage the government's 'low in the first half, high in the second half' economic forecast. The Korea Development Institute (KDI) also analyzed yesterday that "amid recent oil price increases, concerns are growing over a sharp rise in grain prices due to geopolitical factors and worsening weather conditions."

Choi Jin-young, a researcher at Ebest Investment & Securities, explained, "Oil prices are in a situation where they can react sensitively even to small demand recoveries due to OPEC+ production cut intensification and extension of cooperation periods," adding, "This will reinforce upward pressure on oil prices until the first half of next year." In particular, rising international oil prices could stimulate domestic inflation again, providing justification for the Bank of Korea to maintain its tight monetary policy for an extended period.

Future international oil prices are expected to be greatly influenced by demand from major countries. At the end of April, despite OPEC+ production cuts, international oil prices fell to the $70 range per barrel largely due to concerns about a U.S. economic slowdown. Recently, however, the U.S. unemployment rate dropped to 3.5% last month, reducing recession expectations and increasing hopes for a soft landing. The Chinese economy, which significantly affects international oil prices, remains uncertain. Despite reopening (resumption of economic activities), private consumption and investment in China have been sluggish, maintaining recession concerns. However, as the Chinese government continues to roll out economic stimulus measures, there is growing expectation that energy demand within China will increase again.