Oil Price Crash... Emergency for DLS Containing Crude Oil

Most Products Entered Principal Loss Zone
No New Oil DLS Products Launched in the Past Month; Mixed Types Also Sharply Declined

[Asia Economy Reporter Minji Lee] International oil prices have plunged below $20 for the first time in 18 years despite OPEC+ (Organization of the Petroleum Exporting Countries (OPEC) member countries and non-OPEC allies) agreeing on production cuts, causing a sharp contraction in derivative-linked securities (DLS) investments. As the decline in oil prices is prolonged, the number of existing investors entering loss zones is expected to increase.

[Image source=Yonhap News]

According to the Korea Securities Depository on the 16th, the scale of public and private DLS issued over the past month (March 16 to April 16) was about 403 billion KRW. Considering that approximately 1.5385 trillion KRW worth of DLS was issued during the same period last year and 1.2943 trillion KRW worth was sold in January alone, the recent issuance volume of DLS has sharply decreased.

The sharp decline in DLS issuance is largely due to the increased volatility in oil prices, which has led to a halt in the launch of oil-related products. DLS are products created based on underlying assets such as commodities like crude oil and gold, corporate credit, indices, interest rates, stocks, and exchange rates. Typically, many DLS products are issued based on corporate credit, indices, crude oil, or a combination of these, but in the past month, there were no products solely based on crude oil. Mixed-type products containing West Texas Intermediate (WTI) or Brent crude oil futures totaled only nine, amounting to 3.09 billion KRW. During the same period last year, DLS issuance related to crude oil reached 53.3 billion KRW.

Although OPEC+ reached an unprecedented agreement to cut production by 9.7 million barrels per day from next month through June, market reactions have not been positive. On the 15th (local time), May delivery WTI closed at $19.87 per barrel on the New York Mercantile Exchange, down 1.2% ($0.24) from the previous day, marking the lowest level since February 2002 in 18 years.

Jeon Gyun, a researcher at Samsung Securities, explained, "Amid deteriorating reputational perceptions of DLS, increased credit risk, and instability in commodity currency markets, the investment environment has worsened. Due to the plunge in international oil prices, most oil-related DLS have triggered knock-in (principal loss) conditions or fallen below the lowest evaluation price."

The number of investors entering the loss zone in DLS is expected to increase more than initially anticipated. For products containing WTI, prices have reached historic lows, causing a significant portion of existing issuances to enter the knock-in zone, resulting in massive valuation losses. Even for no-knock-in products, early redemption has been delayed, and some products nearing maturity have confirmed principal losses. According to Samsung Securities data, as of the end of last month, among 664 WTI-linked DLS issued since 2018 excluding early redemption volumes (issuance scale of 398 billion KRW), 562 products (310 billion KRW) are estimated to have an evaluation return rate below -60%.

The market believes that to slow the downward trend, the oversupply problem must be resolved. Kim Kwangrae, a researcher at Samsung Futures, said, "The U.S. is aware of the current situation and is discussing production cuts for the entire Texas oil output. To stop the decline in oil prices and reduce the burden of future production increases, it is highly likely that a decision to cut production will be made."

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