Dubai crude jumps $32 in a month, but petroleum price cap likely to remain frozen

[Financial News] Although Dubai crude has jumped by more than $32 per barrel in less than a month amid supply concerns stemming from the Middle East, the government is seriously considering freezing the 10th petroleum product price cap at its current level. The move is intended to ease the burden of consumer prices ahead of the Chuseok holiday. If the freeze is confirmed, the same price ceiling will have been maintained for three consecutive rounds, from the eighth and ninth to the 10th.
According to the government and industry on the 18th, the 10th petroleum product price cap is likely to remain at the same levels as the current ninth round: 1,784 won per liter for gasoline, 1,773 won for diesel and 1,380 won for kerosene. On June 27, the government lowered the seventh-round cap by 150 won per liter for each fuel type and then maintained the same levels in the eighth and ninth rounds. However, the Ministry of Industry and Trade said the previous day, "No specific details of the 10th price cap have been decided," adding that the final prices are scheduled to be announced at 6 p.m. that day.
The price-cap system sets a ceiling on refiners' domestic supply prices, rather than on gas station retail prices. It applies to regular gasoline, diesel and kerosene, with the government temporarily intervening in the existing price-setting structure, which reflects international spot-market petroleum product prices and exchange rates.
The problem is the gap between costs and the cap on supply prices. According to Petronet operated by the Korea National Oil Corporation (KNOC), Dubai crude rose from $95.60 per barrel on August 20 to $127.70 on the 15th of this month, an increase of $32.10, or 33.6%. Over the same period, Brent Crude Oil rose 16.0%, while West Texas Intermediate crude oil (WTI) increased 20.5%.
Freight and insurance costs are also rising as disruptions to Saudi Arabia's east-west pipeline overlap with shipping uncertainty in the Red Sea. Hana Securities analyzed that domestic sales profitability at refiners could deteriorate if higher procurement costs for Middle Eastern crude coincide with the domestic price cap.
The refining industry's reliance on low margins is another concern. According to the Korea Petroleum Association, the operating profit margin of the four major refiners' refining businesses was 0.5% last year, while the average over the 19 years since 2007 was also only about 1.6%. Industry observers warn that continued increases in international oil prices and transportation costs, combined with a continued ceiling on domestic supply prices, could further pressure the profitability of domestic sales.
The losses will be settled afterward. Refiners are preparing documents for the first round of compensation covering gasoline, diesel and kerosene sold domestically from the implementation of the price-cap system through the end of June. Each company will calculate its losses and submit the documents after review by an accounting firm. The settlement committee will then examine costs and an appropriate margin before determining the compensation amount. Refiners are expected to submit the relevant documents by the 30th.
There are also concerns that a prolonged price-cap system could increase the fiscal burden. The government included 1.4497 trillion won in its Ministry of Industry 2027 budget proposal for the 'Oil Price Stabilization Support' program, which will compensate losses from the price-cap system in the fourth quarter of this year. If international oil prices continue to rise while the supply-price ceiling remains in place, the actual settlement amount could also increase.
However, crude oil supplies themselves remain stable for now. According to the Korea Petroleum Association, South Korea imported 93.18 million barrels of crude oil in July, up 9.8% from the same month a year earlier. Thanks to government support for crude oil supply and strategic-reserve swaps, disruptions to the domestic supply of petroleum products remain limited for the time being.
Refiners believe that continued freezing of the price cap could increase the burden on domestic sales as international oil prices, freight costs and insurance premiums rise simultaneously. Some in the industry estimate that cumulative losses, calculated based on the gap between domestic selling prices linked to petroleum product prices in the Mean of Platts Singapore (MOPS) spot market and the domestic price cap, could reach as much as 5 trillion won. However, this is an estimate based on international petroleum product prices and may differ from the actual losses the government compensates after review by the settlement committee. An official from the Korea Petroleum Association said, "As this is the first settlement, the key issues will be which cost items the settlement committee recognizes as expenses and how it calculates the appropriate margin."
[email protected] Kim Mi-hee Reporter