The U.S. Federal Reserve's interest rate hike is exerting downward pressure on international oil prices. The tightening of monetary policy is expected to dampen consumption and investment, while a stronger dollar could suppress oil demand.
On September 16, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 0.25 percentage points to 3.75% to 4.00%. This decision aims to bring the high inflation rate back to the target of 2%.
Typically, an increase in interest rates is seen as a factor that reduces oil demand, leading to lower international oil prices. As borrowing costs rise for households and businesses, consumption and investment tend to decline. Consequently, fuel consumption necessary for production and transportation slows down, resulting in downward pressure on demand.
A stronger dollar also weighs on oil prices. Since crude oil is primarily traded in dollars, an increase in the dollar's value raises the purchasing burden for countries outside the U.S. It requires more of their local currency to buy the same amount of oil.
However, concerns remain regarding supply disruptions stemming from the Middle East. Recently, escalating clashes between Saudi Arabia, the world's largest oil exporter, and Houthi rebels in Yemen have shaken the global oil market. A drone attack temporarily halted operations on a Saudi pipeline, impacting both the East-West pipeline and the Bab-el-Mandeb Strait, a key alternative route.
As demand pressures increase, analysts warn that significant disruptions to oil production facilities or transportation routes could lead to a supply decrease, potentially driving up prices. The International Energy Agency (IEA) reported in its September oil market report that global oil production fell by 1.6 million barrels per day in August compared to the previous month, largely due to heightened risks in the Gulf region.
For domestic consumers, exchange rates add another variable. If the U.S. interest rate hike leads to a stronger dollar and an increase in the won-dollar exchange rate, the cost of imports in won will rise. Should supply shortages due to refinery operational issues worsen, the international oil products market could also face shocks, exacerbating supply-demand imbalances.
The government's price cap system for oil products influences domestic price trends. According to the Ministry of Trade, Industry and Energy, the current ninth price cap will end on September 18. The government had previously lowered the seventh price cap in June and has since frozen it twice.
* This article has been translated by AI.
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