'No Longer a Safe Asset'... Ultra-Low Oil Prices That Changed Even Economic Common Sense

'Paid Crude Oil Purchases' Amid Negative Prices
Concerns Over Next Month's Oil Prices if Storage Tank Shortage Persists
US Considers Ban on Crude Imports to Protect Energy Industry
Appeals to USTR to Increase Purchases from China

[Asia Economy Reporter Naju-seok] The unprecedented low oil prices are overturning conventional economic wisdom. Not only has the bizarre phenomenon of having to pay to sell products appeared, but repeated sharp declines have put the reputation of oil as a 'traditional safe asset' at risk of being stripped away. Due to the novel coronavirus disease (COVID-19), a sense of crisis is intensifying across industries including oil and energy.

On the 21st (local time), Brent crude oil, which had shown relatively stable trends compared to West Texas Intermediate (WTI), fell 24% and closed at $19.33 per barrel. This is the first time in 18 years that Brent crude has fallen below $20 per barrel. Since Brent crude is the global benchmark for oil prices, the significance of this price drop is different.

June delivery WTI crude oil, which recorded negative prices the previous day, was trading at $13.87 per barrel, up 19.9% ($2.3) in the over-the-counter market as of 10 a.m. Korean time on the 22nd. Earlier, June delivery WTI closed at $11.57 per barrel, down 43.4% ($8.86) at the New York Mercantile Exchange (NYMEX) the previous day. During the day, WTI even briefly hit $6.50 per barrel.

The impact of abnormally low oil prices on the market is beyond imagination. One foreign media outlet evaluated, "With international oil prices entering negative territory, the reputation of oil as a safe asset has been broken." This is the result of a significant drop in oil demand due to COVID-19 while supply remained steady, leaving no more storage space for oil.

According to the Wall Street Journal (WSJ), the energy industry could lead to further declines in the U.S. stock market. On the 21st at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 2.67% (631.56 points) to 23,018.88, and the S&P 500 index dropped 3.07% (86.6 points) to 2,736.56 due to the oil price crash.

Investors are focusing on how far the ripple effects of the oil price crash will extend. Not only the stocks of energy-related companies but also the currencies of oil-producing countries such as Russia and Mexico have started to fluctuate.

[Image source=Yonhap News]

In particular, in the United States, the world's largest oil producer, concerns have grown not only about the energy industry but also about the economy itself. This is because the economic shock caused by the oil price crash is inevitable in addition to the economic contraction caused by COVID-19. Experts expect that the reduction in investment and layoffs in energy-related companies will shock the overall economy. Especially, the crisis in energy-related companies is expected to burden not only stock prices but also the entire banking industry that has dealt with these companies.

The market is also giving weight to the possibility of negative oil prices occurring again. The sharp plunge of May delivery WTI to -$37.63 per barrel was due to the nature of futures trading, and if demand does not recover, a similar phenomenon could occur at the close of June futures trading. Elco Hoestra, CEO of Royal Vopak, a Dutch oil storage company, said, "Traders have surrendered to the fact that storage capacity has reached its limit."

The U.S. government's response has accelerated. President Donald Trump tweeted on the day, "We will not let the U.S. oil and gas industry collapse," and said, "I have instructed the Department of Energy and the Treasury to develop plans to use funds to ensure that related industry companies and jobs can be maintained in the future." The day before, President Trump also announced a plan for a strategic reserve of 75 million barrels. Republican Senator Kevin Cramer has also advocated banning imports of oil produced in Saudi Arabia.

The U.S. energy industry is demanding that the government pressure China to purchase U.S. crude oil instead of Saudi Arabia or Russia. The American Petroleum Institute requested the U.S. Trade Representative to exert influence so that China buys U.S. crude oil under the U.S.-China trade agreement. Earlier this year, the U.S. and China ended their trade war, with China promising to purchase $52.4 billion worth of U.S. energy products.

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