[Click eStock] "Limited Room for International Oil Price Increase"

Shinhan Investment Corp. analyzed on the 24th that the potential for international oil prices to rise is not significant.

Ji-yeon Hong, a researcher at Shinhan Investment Corp., stated, “The price of West Texas Intermediate (WTI) crude oil has risen by 12% from its low point in December last year, causing inflation concerns,” adding, “Since asset markets overall experienced sharp interest rate hikes and increased volatility at the end and beginning of the year, the direction of international oil prices is important in determining the financial environment.”

Researcher Hong viewed that the potential for oil price increases from the demand side is limited. He explained, “The correlation between the ISM manufacturing index and oil demand has weakened compared to the past,” and “Oil demand is influenced by economic activity (service sector conditions), but the decoupling between manufacturing and service sector conditions has deepened since COVID-19.”

He continued, “Currently, the ISM manufacturing index is attempting a rebound from its low point, but despite market expectations of a manufacturing cycle recovery, oil demand is unlikely to be significantly stimulated.”

He cited the following reasons: ▲ The expected reduction in China’s role as the world’s largest oil-consuming market ▲ The U.S. service sector economy remains favorable but is expected to gradually slow down over time.

Additionally, although the recent sharp rise in oil prices mainly originated from supply-side factors (U.S. sanctions against Russia), the prospect of resolving supply-side uncertainties is also positive.

Researcher Hong explained, “An increase in U.S. oil production is expected,” adding, “In the speech marking the start of Trump’s second term, he declared an expansion of energy production.” However, he noted that there is a time lag between policy implementation and production, and the total amount of increased production remains a variable.

The decline in oil production share by the Organization of the Petroleum Exporting Countries Plus (OPEC+) and member countries raising skepticism about production cuts are also expected to act as factors preventing oil price increases.

Researcher Hong said, “The current WTI price level is below Saudi Arabia’s fiscal breakeven oil price (above $98),” and “Since the benefits that member countries gain from oil production cuts are unclear, there is little incentive to comply with the production cut policy.”

He added, “Compared to the past, the impact of geopolitical tensions on oil prices is limited,” and “Assuming that the U.S. Federal Reserve (Fed) does not shift to a rate hike stance, international oil prices are unlikely to disrupt asset market trajectories.”