Escalating Middle East conflict spurs crude oil surge

The sudden attack on Israel by the Palestinian armed faction Hamas has thrown the Middle East into a state of extreme unpredictability. This development is creating fresh risks for the Korean economy, which is still on its path to recovery. The global financial market is displaying signs of instability, exemplified by a rapid 4% increase in international oil prices within a single day. Investors are seeking refuge in safe assets such as the dollar and gold amidst this uncertainty. As the geopolitical crisis escalates, concerns are mounting that it could exacerbate the challenges faced by the Korean economy, which is already grappling with the triple conundrum of high interest rates, a strong exchange rate, and soaring oil prices.

On Monday, the West Texas Intermediate Crude Oil (WTI) futures price on the New York Mercantile Exchange surged past $88 per barrel during the day, marking a significant increase of approximately 4.7% from the previous trading day. There are anticipations that international oil prices, which had recently been stagnant due to concerns about an economic slowdown, might resume their upward trajectory and surpass the $100 mark. With the strengthening of the dollar due to increased demand for safe assets, there are growing worries that the won-dollar exchange rate could reach 1,400 won. It is crucial to closely monitor the financial market, especially as it reopens after a three-day holiday, to prevent it from being engulfed in anxiety.

Should this situation evolve into a proxy conflict between the United States and Iran, a significant spike in oil prices appears inevitable. This would be of particular concern for Korea, as the country witnessed a nearly 20% increase in imports of Middle Eastern crude oil in the past year. A surge in oil prices could potentially drive up overall prices, especially considering the heightened demand for energy during the winter months. Consumer prices in September have already exhibited volatility, registering a 3.7% YoY increase, which raises a red flag for price management.

Some believe that the impact of this incident on oil prices may not be long-lasting. Historically, conflicts between Israel and the Arab world have typically been of short duration, and apart from the initial two oil shocks, oil prices have tended to stabilize after a brief surge. However, it is premature to lower our guard. It's worth noting that at the outset of the situation, nobody could have foreseen the protracted nature of Russia's invasion of Ukraine, which began in February of the previous year and had far-reaching effects on the global economy. Therefore, it is imperative to thoroughly examine all potential risks in both the financial and real markets while remaining vigilant and considering all possible scenarios.