Eventually a Warning Light... Will the Heated Crude Oil Investment Cool Down?

Financial Authorities Issue 'Risk' Alert as Discrepancy Rate Exceeds 90%
"Psychology Prevails to Continue Investing Despite Discrepancy Rate"

[Asia Economy Reporter Minji Lee] Despite financial authorities repeatedly issuing warnings about 'WTI Leverage Listed Index Securities (ETN),' individual investors' 'blind crude oil investments' show little sign of subsiding. This is because, with crude oil prices expected to rise, more investors are aiming for arbitrage profits even while bearing the increased premium rates.

[Image source=Yonhap News]

According to the Korea Exchange on the 10th, as of 10 a.m., the real-time indicative value (IIV) of the 'Samsung Leverage WTI Crude Oil Futures' was maintained at 1559.09, but the actual product's bid price was recorded at 2,810 won, resulting in an intraday premium rate of 80.35%. Investors effectively paid about 1,250 won more than the actual price to purchase this product. The 'Shinhan Leverage WTI Crude Oil Futures' also showed a premium rate of 59.12%. The IIV was 1,231.78, but the trading price was 1,960 won. As crude oil futures prices fell, making the price more attractive, investors' buying momentum appears to be heating up further.

On the previous day, WTI closed at $22.76, down 9% from the previous trading day, after OPEC+ (a consultative group of OPEC and 10 non-member countries including Russia) held an emergency meeting and agreed to cut production by 10 million barrels per day. However, since the agreed production cut was below the expected level (15 to 20 million barrels), the price dropped.

ETNs are managed by liquidity providers (LPs) who supply liquidity by managing buy and sell quotes. When investors want to buy a specific product, LPs sell the same amount on the opposite side to reduce the premium between the ETN and the IIV. However, as investors bought up even the LP-held quantities, LPs could no longer perform their role, causing the premium rate to spiral out of control, reaching as high as the 90% range.

Financial authorities have taken strong market measures against the leverage WTI crude oil ETNs, which are forming abnormal prices. The Financial Supervisory Service issued a 'Risk' consumer alert?the highest level?for the first time the previous day, and the Korea Exchange plans to switch to a single-price trading system starting from the 13th. Trading suspensions will be extended if the premium rate does not normalize.

A Korea Exchange official said, "Switching to single-price trading means that trading will not occur for a certain period and the price will be set at a consolidated price, which is expected to somewhat calm the current irrational situation," adding, "Issuers and LPs have also increased the listed quantities compared to before, so the premium rate can be partially narrowed."

Some expect that despite the financial authorities' market measures, the premium rate will not easily decrease. This is because investors are strongly inclined to accept the premium rate in hopes of profiting when crude oil prices rise. In this situation, even if LPs list additional quantities, the narrowing of the premium rate is expected to be only temporary, and it will be difficult to lower the upward trend.

An industry insider said, "When LP quantities were additionally listed last month, the premium rate stabilized in the early trading hours, but after the quantities were sold out, the premium rate surged again," diagnosing, "In the current situation, which has turned into a speculative market, crude oil prices need to recover to at least $40 for investment sentiment to return to rationality."

OPEC+ plans to maintain production cuts of 10 million barrels in May and June, followed by cuts of about 8 million and 6 million barrels in the second half of the year and next year, respectively. Researcher Byungjin Hwang of NH Investment & Securities explained, "WTI prices will have downward rigidity around the $20 level," adding, "Although there has been significant uncertainty in supply and demand, this production cut agreement is judged to have alleviated at least the minimum supply uncertainty."