Oil Prices Soar and Plunge, Trading Halted, Investors Sigh

Volatility Amid Production Cut Negotiation Deadlock... Korea Exchange Announces Trading Suspension for Crude Oil ETNs as Premium Rates Soar

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[Asia Economy Reporter Minwoo Lee] Individual investors who ventured into crude oil investments are facing disappointment. International crude oil prices have fallen to their lowest level in 18 years, and although investors hoped for a rebound, the production cut negotiations among oil-producing countries have not proceeded smoothly, causing prices to drop again after a brief rally. Due to the impact of the novel coronavirus disease (COVID-19), crude oil demand itself has decreased, leading to forecasts that a rebound will be difficult in the near future. To make matters worse, the Korea Exchange has announced a trading suspension measure on crude oil-related exchange-traded notes (ETNs) amid concerns over speculation, intensifying investor anxiety.

According to Bloomberg on the 7th (local time), West Texas Intermediate (WTI) crude oil for May delivery on the New York Mercantile Exchange (NYMEX) closed at $23.63 (approximately 28,800 KRW), down 9.4% from the previous session. This marks a decline for two consecutive days following an 11.9% drop the day before. This contrasts sharply with last week’s surge of over 32% driven by expectations of a production cut agreement between Saudi Arabia and Russia. The emergency meeting of the Organization of the Petroleum Exporting Countries (OPEC) and 10 oil-producing countries, known as OPEC+, to discuss production cuts has been postponed. Even if major oil-producing countries agree to cut production, forecasts suggest that due to the COVID-19 impact, crude oil demand will remain weak, making a rebound difficult for the time being, increasing anxiety among crude oil investors.

The Korea Exchange’s announcement of a trading suspension on domestic crude oil investment products is also a negative factor. The exchange stated that if the premium rate (the difference between the market price and the indicative value) of WTI crude oil futures ETNs exceeds 30% for five consecutive trading days based on the closing price, trading will be suspended for one day. This measure aims to prevent market overheating as the premium rate soared to abnormal levels amid increased demand for oil-linked ETNs. The premium rate of Samsung Securities’ 'Samsung WTI Leverage Futures ETN,' which has the highest trading volume, surged to 86.2% during the previous session. Due to expectations of an oil price rebound, securities firms, acting as liquidity providers (LPs), bought additional listed shares to reduce the premium rate, causing prices to soar. The price of Samsung WTI Leverage Futures ETN surged 279% to 4,100 KRW within six trading days after hitting a record low of 1,470 KRW on the 30th of last month.

A Korea Exchange official explained, "As individual investors have recently increased their participation in crude oil products, buying ETNs at prices higher than their indicative values can lead to losses during the process of market prices converging to indicative values. This measure was taken to somewhat calm the overheated atmosphere." Kim (38), an office worker who invested in crude oil ETNs for the first time, said, "I jumped in thinking the oil price would rise to at least $40, but the price is not rising, and with the exchange’s measures, I have no idea what will happen next."

With the oil price decline and the exchange’s measures coinciding, the prices of ETN products seem to be stabilizing. As of 10 a.m. on the day, the price of Samsung WTI Leverage Futures ETN was 3,170 KRW, down 11.47% from the previous day. However, as oil prices also fell, the premium rate remained at around 77% at the same time.