Companies under pressure as oil prices soar
Korean companies are on high alert over soaring oil prices, sparked by the escalating Russian invasion of Ukraine and the continued global supply bottlenecks, as higher prices have begun chipping at their bottom lines, according to company officials Tuesday.
The situation will likely worsen before it gets better for refining, petrochemical, airline and shipping firms, among others, with crude prices expected to continue heading upward as the United States and Europe are posed to ban Russian oil and gas from the international market. Some analysts predict that prices could rise to as high as $185 per barrel in the coming days.
Brent crude stood at $139.13 per barrel and U.S. West Texas Intermediate (WTI) was at $130.50 per barrel, Tuesday, the first time since 2008 that international oil prices broke the $130 mark.
Korea ranks first among OECD member nations in terms of dependence on crude oil.
Petrochemical companies have also been hit hard, with profitability deterioration inevitable as naphtha prices rise. According to the Ministry of Trade, Industry and Energy, the price of naphtha stood at $1,023 per ton as of Friday, up 36.7 percent from $748 at the end of last year.
Petrochemical companies are pushing to expand facilities that can use liquefied petroleum gas (LPG) and shale gas as raw materials for ethylene production instead of naphtha.
Airlines and shipping companies are also in a price crisis. In the case of Korean Air, which consumes about 30 million barrels of oil annually, if the oil price rises by $1, the airline’s cost burden increases by about $30 million. In the fourth quarter of last year, Korean Air’s annual fuel spending was 588 billion won. Costs are expected to increase significantly more in the first quarter of this year.
“We are preparing for the risk of oil price fluctuations through derivatives trading, but the rise in oil prices is somewhat burdensome in a situation where performance improvement is limited due to the continued high oil price trend and COVID-19,” a Korean Air official said.
HMM spent about 760 billion won for fuel last year, but it is expected to pay more than 1 trillion won this year. The average annual price of bunker C oil last year was $419 per ton, but as of Friday, the cost increased sharply to $612 per ton.
“As oil prices continue to rise, we plan to make further efforts to reduce costs,” an HMM official said.
U.S. Secretary of State Antony Blinken said that the U.S. was considering a ban on Russian oil imports with European allies, a move that could push oil prices up further.
JP Morgan predicted that the international oil prices could rise to $185 per barrel by the end of this year, if Russia’s crude oil supply disruptions continue.