International Oil Prices Surge on Expectations of Continued OPEC+ Production Cuts
Consumer Prices Likely to Rise from 2% to 3% Range
International oil prices have reached their highest level in four months, raising concerns about potential inflationary pressure on consumer prices. The consumer price inflation rate, which had fallen to the 2% range in January, is expected to return to the 3% range in February and March.
According to the New York Mercantile Exchange on the 4th, the price of West Texas Intermediate (WTI) crude oil rose 2.19% to $79.97 per barrel as of the 1st, marking the highest closing price since November 6 of last year. WTI has increased by 13.6% so far this year.
International oil prices rose following news that OPEC+ decided to extend its existing production cut agreement of about 2 million barrels per day until the end of June this year to prevent oversupply and support oil prices. OPEC+ is an alliance of oil-producing countries including the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, along with Russia, Mexico, and others.
OPEC+ initiated production cuts due to a decline in oil demand caused by China's economic slowdown and increased oil production in the United States, which had led to relatively stable oil prices. Saudi Arabia and Russia, the leading countries in OPEC+, are in situations where they need to raise oil prices due to large-scale national development and war, respectively.
As oil-producing countries continue to cut production, oil prices are expected to remain on an upward trend for the time being. Jeongseok Oh, a senior fellow at the International Finance Center, explained, "The prevailing view is that international oil prices will rise in the second half of this year due to interest rate cuts in major countries and expectations of global oil demand recovery. However, the burden on oil-producing countries due to continued production cuts is increasing, so there is also a possibility that some OPEC member countries may increase production."
The problem is that the rise in international oil prices is highly likely to stimulate inflation in various countries. In particular, South Korea's consumer prices are closely linked to international oil prices, so the consumer price inflation rate, which had been showing a downward stabilization trend, is likely to rise again.
The government has already warned several times that the domestic consumer price inflation rate, which had fallen to 2.8% in January, could rise back to the 3% range in February and March. Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, predicted at the price-related ministers' meeting held early last month, "Due to instability in the Middle East region, international oil prices are rising, and consumer prices in February and March could rise again to around 3%."
This outlook is further supported by soaring prices not only in international oil but also in agricultural products this year. Since October last year, agricultural product prices, especially for fruits such as apples and pears, have been recording double-digit increases. Kim Byung-hwan, First Vice Minister of the Ministry of Economy and Finance, said at the price-related vice ministers' meeting held at the Government Seoul Office on the 29th of last month, "The inflation rate in February may exceed 3% as the rate of increase is larger than in January."
Rising prices delay the timing of interest rate cuts and can burden the recovering economy, posing a challenge for the government. The Bank of Korea also pointed out in its recent revised economic outlook, "Considering the recent rise in oil prices due to geopolitical risks and the continued high level of agricultural product prices, consumer price inflation is likely to rise temporarily to some extent."
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