"Never thought it would happen again"... Fear of 3rd Oil Shock from 'Ukraine Invasion', Direct Hit to Korean Companies (Comprehensive)

Brent Oil Hits 14-Year High
Industries Highly Dependent on Crude Oil on Alert
Additional Russian Energy Sanctions Deliver Direct Blow

Fuel Costs Rise for Aviation and Shipping
Korean Air Q4 Last Year Up 128%

Refining Industry on Edge Amid Prolonged War
Concerns Over Demand Shrinkage Due to Petroleum Price Hikes

Firefighters extinguishing a fire at a city building destroyed by a Russian airstrike in Chernihiv, a city northeast of Kyiv, the capital of Ukraine, on the 3rd (local time). (Image source=AP Yonhap News)

[Asia Economy reporters Moon Chaeseok and Yoo Hyunseok] As international oil prices surpassed $130 per barrel for the first time in 14 years, a state of emergency has been triggered in the domestic industrial sector, which heavily depends on crude oil imports. The burden of soaring raw material prices combined with a sharp rise in energy costs has already disrupted this year's business plans. In particular, depending on whether additional energy sanctions against Russia are imposed, an 'oil shock'-level impact is inevitable, raising concerns about severe damage to the entire domestic economy.

On the 7th (local time), the April West Texas Intermediate (WTI) crude oil price closed at $119.40 per barrel on the New York Mercantile Exchange. This is the highest closing price since September 2008. During the session, it surged 12.81% to reach $130.50 per barrel. At the same time, May Brent crude oil on the London ICE Futures Exchange closed at $123.21 per barrel, up $5.10 (4.32%) from the previous day. It also hit an intraday high of $137.00, up 15.99%, marking the highest level since July 2008.

The cost burden on the industrial sector, which has the highest crude oil dependency among OECD member countries, is expected to increase sharply. According to the Korea National Oil Corporation, Russian crude accounted for 5.6%, or 53.74 million barrels, of domestic crude oil imports last year.

The aviation and shipping industries are on high alert. Fuel costs are considered significant fixed expenses, accounting for 20-30% of the cost of goods sold in aviation and 15-25% in shipping. In fact, Korean Air spent 589.1 billion KRW on fuel costs in the fourth quarter of last year, when oil prices began to rise. This amount represents a 128.2% increase compared to the same period the previous year. Annually, the fuel cost reached 1.8 trillion KRW, a 44.3% increase from 2020. A Korean Air official explained, "Considering statistical data and market conditions, we plan to implement hedging and other risk management measures."

HMM also spent 681.4 billion KRW on fuel costs, accounting for 15.5% of its cost of goods sold totaling 4.3941 trillion KRW through the third quarter of last year. Since oil prices began to surge from December last year, it is expected that these companies' fuel expenses in the first quarter of this year have increased further. A shipping industry official said, "Although it varies depending on whether bulk carriers or container ships are the focus, rising fuel costs are a negative factor for the shipping industry."

The petrochemical industry, which produces petroleum products from crude oil, is also expected to be affected. A petrochemical industry official said, "Combining government and private refiners' crude oil reserves amounts to about 200 days' supply. While there is a low possibility of a 'shutdown' due to immediate naphtha supply disruptions, if the war prolongs, production costs will rise, reducing product cost competitiveness and causing bigger problems."

The refining industry is closely monitoring the duration of the war. While rising oil prices increase the value of crude oil reserves, resulting in inventory revaluation gains, sustained sharp increases raise uncertainties that could lead to petroleum product price hikes and demand contraction. This worst-case scenario prompts consideration of emergency measures such as lowering operating rates. The refining margin, which is the core profitability indicator for refiners and calculated by subtracting crude oil prices and transportation costs from petroleum product prices, has also sharply declined. A refining industry official said, "Since contracts signed in January will cover until April, even if refiners want to reduce operating rates, it will be difficult without securing storage space for inventory." Another official added, "The volatility in oil prices caused by the war appears to have caused a short-term sharp decline in refining margins, but it remains to be seen whether this trend will lead to an overall decrease in petroleum product demand."

This content was produced with the assistance of AI translation services.