Oil price instability persists amidst Trump-driven expectations of Middle East peace, intensifying domestic inflationary pressure.

What Happened

The recent situation in the Middle East is becoming complex due to former U.S. President Donald Trump's remarks on Iran and France's military movements. Former President Trump stated that there is a high possibility of a nuclear agreement with Iran before his visit to China next week, while also warning that if an agreement fails, he would "bomb Iran at a much higher level," taking a two-sided stance. Amidst this, France has deployed a nuclear-powered aircraft carrier to the Red Sea to support freedom of navigation in the Strait of Hormuz after the Iran war, making efforts to de-escalate regional tensions and stabilize maritime logistics. In such an uncertain geopolitical situation, international oil prices surged by 20% in April alone, causing unusual inflationary pressure.

Why It Matters

Geopolitical risks in the Middle East are one of the key variables in the global economy, directly impacting global inflation and economic growth through oil price volatility. Former President Trump's remarks on Iran are reminiscent of past 'maximum pressure' policies, and coupled with his potential return to power, they maximize the unpredictability of the Middle East situation. France's deployment of a nuclear aircraft carrier demonstrates the significant interests major European countries have in the stability of the Red Sea and the Strait of Hormuz, suggesting that the security of this region, a key artery for maritime logistics, is not solely a concern for specific nations. However, despite these efforts, international oil prices remain at high levels, placing a severe burden on global supply chains and prices. Especially for countries highly dependent on crude oil imports, such as South Korea, an oil price shock originating from the Middle East can have a very significant ripple effect across the entire economy.

Impact on the Korean Market

The surge in international oil prices is expected to cause an all-encompassing inflation shock to the South Korean economy. Although the consumer price inflation rate recorded 2.6% in April, the Bank of Korea forecasts that prices will rise further in May. Rising oil prices could sequentially push up service prices, including airfares, car repair costs, and laundry fees, weakening households' real purchasing power and dampening consumer sentiment. Furthermore, the refining industry is expected to incur losses amounting to 4 trillion won as it cannot fully pass on the oil price increases to consumers due to the government's price ceiling policy, raising concerns about a deterioration in profitability across the industry. This could negatively impact domestic companies' investment and employment, and act as a factor delaying the Bank of Korea's interest rate cut, putting upward pressure on the bond market. Safe-haven sentiment may also strengthen.

Key Stock Analysis

• WTI Crude Oil (commodity): While there might be a temporary dip in oil prices following Trump's remarks on a potential agreement with Iran, oil prices will remain highly volatile due to the mention of potential bombing if an agreement fails and the fundamental supply instability in the Middle East. Overall upward pressure is expected to persist.
• Brent Crude Oil (commodity): Expected to show a similar trend to WTI. While France's military intervention is positive for maritime safety, the direction of oil prices will largely depend on whether a nuclear agreement with Iran is reached.
• Gold (commodity): As geopolitical risks in the Middle East are not fully resolved and inflation concerns persist, demand for gold as a safe-haven asset will remain steady. Gold prices are expected to maintain a robust trend.
• Korea 10-Year Government Bond (bond): Inflationary pressure from surging oil prices weakens expectations for a Bank of Korea interest rate cut, which could act as a factor for rising government bond yields. If Middle East risks prolong, it could also partially affect national credit ratings.
• S-Oil (010950, stock): Rising international oil prices increase the cost burden for refiners, but it is difficult to reflect this in sales prices due to the government's continued price ceiling policy. A deterioration in profitability is inevitable, with losses estimated at 4 trillion won, which will negatively impact the stock price.
• SK Innovation (096770, stock): Similar to S-Oil, a deterioration in the profitability of the refining business segment is expected. Rising oil prices and government price controls will pressure refining margins, negatively impacting overall performance.
• Korean Air (003490, stock): Jet fuel prices account for a significant portion of airline operating costs. A surge in oil prices will directly and negatively impact Korean Air's profitability, and even if partially offset by fare increases, the overall cost burden will be unavoidable.
• Korea Zinc (010130, stock): Despite the geopolitical crisis in the Middle East, Korea Zinc recorded its highest-ever performance due to strong sales of precious metals and key minerals. This is a benefit from safe-haven sentiment and rising raw material prices, and positive effects could continue if geopolitical uncertainty persists.

Future Scenarios

Optimistic Scenario: If former President Trump's nuclear agreement with Iran progresses faster than expected, and the safety of navigation in the Strait of Hormuz is firmly guaranteed, international oil prices could stabilize. This would alleviate global inflationary pressures, provide central banks with more monetary policy flexibility, and positively impact economic recovery. Losses for domestic refiners could also be reduced.

Pessimistic Scenario: If Trump's negotiations with Iran fail and military tensions escalate, or if extreme situations such as Iran re-blocking the Strait of Hormuz occur, oil prices would skyrocket, and global supply chains would fall into severe disarray. This would heighten global stagflation concerns and could deal a fatal blow to the South Korean economy.

Key Variables to Watch: Further remarks by former President Trump regarding Iran, the actual progress of negotiations between Iran and the U.S., the extent of increased intervention by European countries such as France in the Middle East, and OPEC+'s production adjustment trends are important. Domestically, attention should be paid to the government's price stabilization measures and the Bank of Korea's monetary policy direction.