Rising oil, LNG prices on back of Iran war could put Korean energy firms in a financial bind

Oil and liquefied natural gas prices are rising simultaneously due to the Middle East crisis. Concerns are also growing that if the crisis drags on, the kind of energy price shock seen during the Russia-Ukraine war could return.

QatarEnergy's liquefied natural gas production facilities in Ras Laffan Industrial City, Qatar, on March 2 [REUTERS/YONHAP]

Oil and liquefied natural gas (LNG) prices are rising simultaneously due to the Middle East crisis, heightening anxiety in the energy market. With LNG prices up more than 40 percent, concerns are also growing that if the crisis drags on, the kind of energy price shock seen during the Russia-Ukraine war could return.

West Texas Intermediate crude for April delivery surged 8.51 percent from the previous session to $81.01 a barrel on the New York Mercantile Exchange on Thursday. The price was the highest level since July 2024, the first such peak in about 20 months. It marks a 20.9 percent climb from Feb. 27, when the Iran crisis began to escalate in earnest.

LNG prices are rising even faster. JKM, the Northeast Asia LNG benchmark for markets including Korea, Japan and China, closed at $15.49 per million British thermal units (MMBtu), up 2.58 percent from the previous day. That marked a 44.4 percent jump since Feb. 27, roughly double the pace of the rise in crude prices.

There are also concerns that LNG prices could rise further if the Middle East crisis becomes drawn out. Korea has an LNG stockpile that exceeds its nine-day supply requirement and has also secured supplies through medium- and long-term contracts. Industry sources say there is no immediate need to buy LNG on the spot market at elevated prices.

Still, many long-term LNG contracts are also linked to crude prices, meaning a prolonged rise in oil prices would inevitably bring a price shock.

Seasonal factors are another variable. LNG prices typically stabilize in spring as winter heating demand eases, then come under renewed upward pressure around summer when cooling demand begins. If competition between Europe and Asia over supply from other producing regions such as the United States intensifies during that period, prices could rise even more steeply.

“There are several variables, including supply volumes from the United States and Russia,” said Cho Hong-jong, a professor of economics at Dankook University. “But if the crisis drags on through May and June, when LNG stockpiling ahead of winter begins in earnest, prices could rise further and intensify inflationary pressure.”

Plumes of smoke rise as strikes hit Tehran during the U.S.-Israeli military campaign on March 5. [AP/ YONHAP]

Higher LNG prices are also likely to add pressure on electricity rates. Korea generated about 28 percent of its electricity from LNG in 2024. The system marginal price (SMP), the wholesale electricity price that serves as the benchmark when Korea Electric Power Corporation (Kepco) buys electricity from power generators, is also heavily affected by LNG prices.

As average LNG prices more than doubled to $34.24 per MMBtu in 2022 from $15.04 in 2021 due to the Russia-Ukraine war, the SMP also surged to 196.7 won (13 cents) per kilowatt-hour from 94.3 won over the same period. LNG prices are reflected in electricity rate costs with a lag of one to two months, while crude prices are reflected with a lag of about five months, according to a Kepco official.

The problem is Kepco’s financial capacity. During the Russia-Ukraine war, Kepco and the Korea Gas Corp. (Kogas) absorbed much of the burden from rising prices.

Kepco posted a 33.9 trillion won loss in 2022, while Kogas’s receivables from supplying gas below cost rose to 8.8 trillion won in 2022 from 1.8 trillion won in 2021. With cumulative losses piled up, state-run energy companies are now far less able to absorb another price shock.

“Given Kepco’s profit level last year, the company is currently in a position to absorb some of the rise in LNG prices,” said Yoo Seung-hoon, a professor of energy policy at Seoul National University of Science and Technology. “But if the crisis drags on through April and May, when LNG prices could spike as Korea secures supplies for summer cooling demand, Kepco’s burden will inevitably grow.”

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom. BY AHN HYO-SEONG [kim.minyoung5@joongang.co.kr]