Global oil prices hit three-month low, but when will pump prices drop?

Global oil prices have fallen to three-month lows after the United States and Iran agreed to a cease-fire, but Korean motorists may have to wait longer for relief at the pump.

Brent crude futures for August delivery fell 4.9 percent to $83.20 per barrel on ICE Futures Europe on Monday. U.S. West Texas Intermediate (WTI) crude for July delivery also dropped 4.8 percent to settle at $80.75 per barrel. Both benchmarks fell to their lowest levels in about three months, since March 10, when the conflict between the United States and Iran was in its early stages.

Domestic fuel prices, however, have shown little change.

The nationwide average gasoline price on Tuesday stood at 2,009.14 won per liter ($5 per gallon) as of 4 p.m. Tuesday, down just 0.29 won from the previous day, according to the Korea National Oil Corporation's fuel price information service, Opinet.

In Seoul, the average gasoline price stood at 2,051.14 won per liter, up 0.03 won from the previous day. Nationwide gasoline prices first exceeded 2,000 won per liter on April 18 and have remained above that level for more than two months.

One reason is that declines in international oil prices do not immediately feed through to prices at domestic gas stations.

Imported crude oil must be transported by sea, refined and distributed nationwide, which creates a lag of roughly two to three weeks. Gas stations must also sell existing inventories purchased at higher prices before lower-cost supplies can affect retail prices.

The effective cost of crude oil remains high for Korean refiners when additional premiums charged by oil-producing countries to Asian importers and transportation costs are taken into account, industry sources say.

The weak won is another burdening factor. As crude oil is traded in U.S. dollars, a high dollar-won exchange rate offsets much of the benefit from falling oil prices. The won closed at 1,511.6 per dollar in Seoul on Tuesday, weaker by 0.5 won from the previous session. The exchange rate has remained above 1,500 won since May 15.

Industry insiders say the government's fuel price cap system is now the most important factor determining retail gasoline prices.

The government is scheduled to announce the seventh round of its price cap program, which takes effect at Thursday midnight. The maximum prices have been frozen four times since March 27 at 1,934 won per liter for gasoline and 1,923 won for diesel.

If the new price ceiling reflects lower international refined fuel prices, retail gasoline prices are likely to decline with a delay.

For refiners, however, the situation is more complicated. Companies would be forced to sell crude oil purchased at high prices in April and May at lower prices, resulting in losses.

"Under normal circumstances, losses from refining expensive crude and selling it at lower prices can be offset by gains earned during periods when cheaper crude is sold at higher prices," an industry representative said. "But the situation is different under the price cap system. While the government has pledged to compensate refiners for their losses, details on how the compensation will be calculated have yet to be announced, leaving significant uncertainty for us."

Many analysts also expect any further decline in oil prices to be gradual. Even if the Strait of Hormuz is fully reopened, it could take months for supply chains to return to normal.

The end of emergency oil stock releases by governments and demand to replenish depleted strategic reserves are also expected to limit downward pressure on prices.

"As some of the disruptions to crude oil supplies have eased, the WTI crude is expected to trade in a range of $75 to $85 per barrel for the time being," said Chun kyu-yeon, an economist at Hana Securities. "However, it could take several months for Middle East crude supplies to fully normalize, meaning the pace of further declines in global oil prices in the second half of the year is likely to remain slow.”

BY AHN HYO-SEONG [[email protected]]