South Korea mulls ending oil price cap as global rates stabilize

South Korea's government is carefully weighing the decision to lift its oil price cap system, a measure implemented to combat inflation, as international crude oil prices have significantly decreased. The benchmark prices for West Texas Intermediate, Brent crude, and Dubai crude are currently hovering in the $80s per barrel. Dubai crude, a primary import for South Korea, has fallen to roughly half its peak of nearly $170 per barrel in late March.

Industry Minister Kim Jeong-kwan has outlined three conditions for ending the price cap: the cessation of hostilities, normalization of the Strait of Hormuz, and sustained oil prices below $90 per barrel. Yang Ki-wook, head of the Ministry of Trade, Industry and Energy's Resource Security Office, stated that the government will make a comprehensive judgment considering the impact on domestic prices and the actual normalization of the Strait of Hormuz, acknowledging the historical precedent of failed ceasefire negotiations.

The price cap system, first introduced after oil price liberalization in 1997, has been effective in curbing inflation. However, prolonged implementation risks distorting the market and potentially leading to supply contractions. The government has maintained the current price cap for nearly three months, following a second adjustment on March 27 that raised gasoline and diesel prices by 210 won per liter. Despite concerns, the government reports securing sufficient oil and liquefied natural gas (LNG) supplies through the end of the year, including alternative sources for Qatar's force majeure declaration.

Experts suggest that the full opening of the Strait of Hormuz and China's crude oil import volume will be key factors influencing future oil prices. Jang Tae-hoon, a researcher at the Korea Energy Economics Institute, noted that the market might be cautious about significant changes immediately following the recent agreement, given the numerous vessels waiting in the Strait and the time required to clear mines and restart facilities. He anticipates prices could stabilize in the low $80s by the fourth quarter, but increased demand from China and restocking efforts by nations that released strategic reserves could limit further price declines.

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Although international oil prices have fallen significantly, we will make a decision after comprehensively judging the normalization of the Strait of Hormuz and the impact of ending the price cap on domestic oil prices.