[Why&Next] Not $150 but $70? ... Divergent International Oil Price Forecasts, Where To?

International Oil Prices Plunge Nearly 5% on Demand Decline Expectations
Less Than Two Months After Surpassing $100, Clear Downtrend
Current Second Half Average $86... Similar to Bank of Korea Forecast
If $70-$80 Range Maintained, Inflation Pressure Likely to Ease

International oil prices, which were considered the biggest variable in inflation rates for the second half of this year, continued their sharp decline on the 16th (local time), dropping nearly 5% in a single day. At the beginning of the Israel-Hamas war in September, many forecasts predicted that international oil prices could soar beyond $100 per barrel and even reach $150, but recently, prices have stabilized downward in the $70 to $80 range.

If this trend continues, the Bank of Korea's inflation and oil price forecasts for this year and next, to be announced on the 30th, are expected to not deviate significantly from the original expectations. However, there are concerns that international oil prices could rise further due to production cuts by oil-producing countries or the impact of the war, and with many uncertainties such as agricultural products and exchange rates beyond oil prices, it is still too early to be complacent about inflation.

Oil prices expected to exceed $100...falling to $70 range

According to the New York Mercantile Exchange and the UK ICE Futures Exchange on the 17th, international oil prices have been steadily declining. On this day, West Texas Intermediate (WTI) crude oil fell $3.76 (4.9%) from the previous day to $72.90 per barrel, and Brent crude, the international oil price benchmark, also dropped $3.76 (4.63%) to $77.42 per barrel. This is the lowest level since July. Dubai crude, which South Korea mainly imports, also fell to around $81.52.

Considering that at the end of September, Brent crude reached $94.36, WTI $93.68, and Dubai crude $94.99, current oil prices are significantly lower. At that time, many global investment banks (IBs) and economic research institutions raised their international oil price forecasts, citing supply shocks due to Saudi Arabia's consecutive production cut decisions and the impact of the Israel-Hamas war.

In fact, Christian Malek, an oil market analyst at JP Morgan, predicted that Brent crude would trade between $90 and $110 per barrel until next year and rise to around $150 in 2026. Goldman Sachs, Citigroup, and Bank of America also raised their international oil price forecasts to the $100 range.

The sharp decline in international oil prices, contrary to initial forecasts in less than two months, is largely due to economic slowdowns in major countries such as the United States, Europe, and China. Despite high interest rates, the U.S. economy, which had continued its boom, is now facing growing recession concerns due to shrinking consumption and worsening fiscal deficits, while China's domestic economy is gradually recovering but the real estate market remains sluggish.

Accordingly, crude oil inventories are also accumulating. According to the U.S. Energy Information Administration (EIA), U.S. commercial crude oil inventories increased by 3.6 million barrels in one week to 439.4 million barrels, exceeding expectations. SK Securities researcher Ahn Young-jin explained, "International oil prices have continued to plunge for two consecutive days amid rising inventories and recession concerns, breaking major technical support levels," adding, "The number of continuous claims for unemployment benefits in the U.S. reached the highest in two years, which seems to have added pressure on oil prices."

On the 4th, as international oil prices fall and fuel tax is further reduced, citizens are refueling their vehicles at a gas station in Seoul. Photo by Mun Ho-nam munonam@

Average for the second half so far is $86...similar to Bank of Korea's forecast

The Bank of Korea, which manages the overall macroeconomy, forecasted in its August economic outlook that the average Brent crude price for the second half of this year would be $84 per barrel. According to the Bank of Korea, as of the afternoon of the previous day, the average for the second half was $86.2 per barrel, not significantly different from the original forecast. Although international oil prices exceeded $90 in September and October, the recent sharp decline has lowered the average somewhat.

Mathematically, if Brent crude maintains the current high $70s or low $80s for the remaining period of this year, the second-half average is likely to be similar to the Bank of Korea's original forecast. Since South Korea is highly dependent on crude oil imports, the Bank of Korea forecasts oil prices on a semiannual basis and uses this to operate monetary policy.

Bank of Korea Governor Lee Chang-yong said in an interview with Bloomberg TV on the 12th of last month, "We assumed international oil prices would remain around the mid-$80s and predicted 2.2% growth next year," adding, "However, if oil prices rise above that, we will have to revise our growth rate." A Bank of Korea official explained, "Although oil prices have fallen slightly now, there is volatility," and "If prices move around the mid-$80s, they could be higher than the original forecast, but if they stay around $80, the forecast will be similar."

Bank of Korea Governor Lee Chang-yong is having a roundtable discussion with Professor Lee Jong-hwa of Korea University’s Department of Economics at the '2nd Bank of Korea-Korea Chamber of Commerce and Industry Joint Seminar' held at the Bank of Korea Annex Conference Hall in Jung-gu, Seoul, on the afternoon of the 1st.
[Photo by Yonhap News]

'Fiscal deficit' Saudi Arabia...will production cuts continue amid weak demand?

Uncertainty surrounding international oil prices remains significant. The key variable is production cuts by oil-producing countries such as Saudi Arabia. Saudi Arabia led oil price increases by implementing record-high production cuts when prices began to fall after the pandemic, but recently, with demand weakening, concerns have deepened.

From Saudi Arabia's perspective, which is investing huge funds in new cities like Neom City, it is necessary to raise oil prices to at least $80 to escape fiscal deficits, but with declining demand and increasing U.S. crude inventories, it is not easy to continue production cuts indiscriminately.

Kim Kwang-rae, senior researcher at Samsung Futures, said, "It is questionable whether Saudi Arabia has the capacity to implement additional production cuts while enduring sacrifices to prevent downward pressure on oil prices amid weak demand," adding, "In a situation exposed to downward pressure due to demand slowdown concerns, the upward pressure on oil prices from additional production cuts may be limited."

Oil price uncertainty remains...Bank of Korea: "Still a major inflation variable"

From the perspective of oil demand, the U.S. and Chinese economies are considered the most important variables.

Economic forecasts for these countries are divided among experts, but concerns about slowdown remain strong. Especially, China's economy, which greatly influences international oil price decisions, has yet to show clear signs of recovery. Shin Seung-woong, a researcher at Shinhan Investment Corp., said, "Considering the time lag for stimulus measures to reflect in the real economy, momentum for economic rebound may strengthen in the first half of next year," but added, "If the housing market slump continues despite government efforts, the economy may slow down again."

Compared to this summer, concerns about rising international oil prices have eased considerably, but domestic inflation uncertainty remains high. Oil prices could surge in the short term depending on the escalation of the Israel-Hamas war, winter cold waves, and the depletion speed of European natural gas inventories. Additionally, inflation could face upward pressure from factors such as exchange rates and consumption beyond oil prices.

A Bank of Korea official said, "Oil and agricultural product prices remain key variables for monthly inflation rates in November and December," adding, "Looking at the annual level next year, exchange rates, consumption, fuel taxes, and electricity, gas, and water charges could affect inflation, so uncertainty remains."