Oil Prices Plummet Amid Spread of Wuhan Pneumonia

WTI Drops Over 15%, Threatening $50 Level... ETF and ETN Underperform, Refining Stocks Also Slide

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] International oil prices are rapidly falling amid concerns that the spread of the novel coronavirus infection (Wuhan pneumonia) will shrink demand from China, the world's largest crude oil importer. Related stocks and exchange-traded funds (ETFs) are also showing a downward trend following consecutive oil price declines.

According to Bloomberg on the 29th, on the 28th (local time) at the New York Mercantile Exchange (NYMEX), March delivery West Texas Intermediate (WTI) crude oil closed at $53.48 per barrel, up 0.6% ($0.34) from the previous day. This marked a rebound after six trading days. Although there was a slight rebound the day before, recent international oil prices have clearly been on a downward trend. WTI, which had risen to around $63 earlier this month, has fallen more than 15% due to the spread of the novel coronavirus, threatening the $50 level.

As international oil prices decline, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) linked to crude oil are also experiencing sluggishness. According to the Korea Exchange, on the previous day, Mirae Asset Leverage Crude Oil Futures Mixed ETN(H) fell 9.00%, and QV Leverage WTI Crude Oil Futures ETN(H) dropped 8.90%, resulting in declines of 19.0% and 18.6% respectively over the past four days. During the same period, KODEX WTI Crude Oil Futures(H) and TIGER Crude Oil Futures Enhanced(H) also fell 10.1% and 10.2%, respectively, surpassing the KOSPI's decline rate (-3.8%).

Refining margin deterioration concerns have also caused refining stocks to plummet. S-Oil closed at 76,400 KRW, down 5.56% (4,500 KRW) from the previous trading day, while SK Innovation and GS fell 3.85% and 3.72%, respectively.

The recent decline in international oil prices is analyzed to be influenced by expectations that the spread of the novel coronavirus will reduce crude oil demand in China, the world's largest crude oil importer. Samsung Futures researcher Kim Kwang-rae explained, "As the number of infected and deceased people increases daily, the Chinese government is responding with strong measures such as the temporary lockdown of Wuhan city and suspension of public transportation operations. The suspension of domestic and international group tours in China and the halting of bus operations in major cities have highlighted concerns about reduced crude oil demand from China, the world's largest importer, and risk-averse sentiment, leading to continued oil price declines."

Since concerns about demand reduction have pulled down international oil prices, the future direction of oil prices is expected to be ultimately determined by crude oil demand and inventory levels. Experts believe that although short-term oil price declines are inevitable due to the impact of the novel coronavirus, concerns about rising inventories are not significant, and recovery is likely within one to two months.

KB Securities researcher Baek Young-chan stated, "In January this year, U.S. crude oil inventories stood at 428 million barrels, 4.7% lower than the same period last year. Considering the production cuts due to declining productivity of U.S. shale companies, U.S. crude oil inventories are expected to continue decreasing." Researcher Kim also forecasted, "Last week, the U.S. Energy Information Administration (EIA) reported a 410,000-barrel decrease in crude oil inventories, indicating that inventory increases due to winter demand declines, which the market was concerned about, have not persisted, thus limiting concerns about future inventory increases."