Oil Prices Plunge to Mid-$40s Amid Pandemic Concerns and Market Panic

[Image source=AP Yonhap News]

[Asia Economy Reporter Eunmo Koo] As the novel coronavirus infection (COVID-19) increasingly appears likely to become a global pandemic, international oil prices have fallen to the mid-$40 range. Given the growing concerns about economic slowdown and weakening demand, attention is being drawn to the supply response from the Organization of the Petroleum Exporting Countries (OPEC) and other major oil-producing countries (OPEC+).

According to Bloomberg on the 2nd, on the 29th of last month at the New York Mercantile Exchange (NYMEX), April delivery West Texas Intermediate (WTI) crude oil closed at $44.76 per barrel, down 4.95% ($2.33). WTI fell 16.14% ($8.62) last week, marking the largest drop since December 2008 during the global financial crisis.

As international oil prices plummeted, exchange-traded products (ETPs) linked to crude oil also plunged sharply. Over the past week, leveraged products such as Shinhan Leverage WTI Crude Oil Futures ETN(H) (-27.0%), QV Leverage WTI Crude Oil Futures ETN(H) (-27.0%), and Mirae Asset Leverage Crude Oil Futures Mixed ETN(H) (-26.6%) showed significant declines. General exchange-traded funds (ETFs) like TIGER Crude Oil Futures Enhanced(H) (-16.7%) and KODEX WTI Crude Oil Futures(H) (-15.8%) also fell more sharply than the KOSPI (-8.1%) during the same period.

The stock prices of refining companies, which are expected to face worsening refining margins (the difference between final product prices and raw material and transportation costs), were no exception. Last week, SK Innovation closed at 113,000 KRW, down 13.4% (17,500 KRW) from the previous week, while S-Oil and GS fell by 10.2% and 6.1%, respectively.

Oil prices are being pressured as the spread of COVID-19 reduces crude oil imports by China, the largest demand country, and fear of COVID-19 spreads to Europe. In particular, the decline in jet fuel demand is driving the sharp drop in oil prices. Kyuyun Jeon, a researcher at Hana Financial Investment, forecasted, "The impact on the aviation industry from this situation is significant, likely exerting downward pressure on oil prices." Due to the COVID-19 impact, jet fuel prices have fallen about 20% compared to the end of last year as aircraft operations sharply decreased.

Since it is difficult to accurately predict the decline in crude oil demand caused by COVID-19, oil prices are expected to continue experiencing high volatility for the time being. With limited options to reverse the current trend in international oil prices, attention should be paid to whether an agreement will be reached at the upcoming OPEC regular meeting scheduled for the 5th.

So-hyun Kim, a researcher at Daishin Securities, stated, "Additional production cuts by OPEC+ are the most reasonable option, but OPEC+ countries already face significant burdens regarding oil production cuts, and it is unclear whether Russia will agree to further cuts. Unless OPEC+ implements cuts beyond expectations, it seems difficult to control the downward pressure on oil prices."

This content was produced with the assistance of AI translation services.