Oil prices fall on US-Iran peace hopes, but high inflation to persist

International oil prices have dropped to their lowest point in three months, reaching $83.17 per barrel for Brent crude's August futures and $80.75 for U.S. West Texas Intermediate's July futures, following a tentative peace agreement between the United States and Iran. Dubai crude, a key indicator for South Korea, also fell below $79 per barrel. This marks the lowest level since March 10, shortly after the conflict in the Middle East began.

Despite the price drop, experts caution that a return to pre-war oil prices, around $60 per barrel, will require significant time. The reconstruction of energy facilities damaged during the conflict is a lengthy process. Furthermore, the upcoming 60-day 'main negotiations' between the U.S. and Iran regarding Iran's nuclear program and economic sanctions could lead to further volatility in oil prices. Even if the Strait of Hormuz remains open, rebuilding and securing distribution networks for damaged energy infrastructure will prevent a rapid decline in oil prices.

“

Even if the Strait of Hormuz is open, it will take time to rebuild destroyed energy facilities and secure distribution networks, making it difficult for oil prices to fall sharply in the short term.

Even if oil prices stabilize, a noticeable impact on consumer prices is not expected immediately. Typically, fluctuations in international oil prices first affect producer prices before gradually translating to consumer prices. In April, producer prices saw their largest year-on-year increase in three and a half years, rising 6.9%. Consumer prices increased by 2.6% year-on-year, with industrial products and personal services rising faster than the overall average.

Analysts suggest that companies must first deplete inventories of petroleum and raw materials purchased at higher prices before they can lower prices. This process will delay the decrease in prices for manufactured goods and services. Once prices for these items rise, they tend to remain high, contributing to sustained inflation. Additionally, a persistently high exchange rate, with the won-dollar rate exceeding 1500 for 21 consecutive trading days, could counteract the benefits of falling oil prices. This high exchange rate is influenced not only by the Middle East conflict but also by the interest rate differential with the U.S. and capital outflow by foreign investors, making a quick stabilization unlikely.

“

Because we need to deplete inventories of petroleum and raw materials purchased at high prices, it will take time for prices of manufactured goods and services to fall. Once prices for manufactured goods and services rise, they don't easily come down, so they are likely to remain high.