[Deputy Director Column] Oil Crisis and Negative Oil Prices

[Asia Economy Reporter Song Hwajeong] In the 1970s, two oil shocks shook the domestic economy. The first oil shock occurred in October 1973 when the Organization of the Petroleum Exporting Countries (OPEC) drastically reduced crude oil production due to the Fourth Middle East War. As crude oil production decreased, oil prices rapidly rose, dealing a heavy blow to South Korea, an oil-importing country.

In 1978, the second oil shock occurred when oil exports were completely halted due to the Islamic Revolution in Iran. Oil prices tripled within a year, and the domestic economy, which was undergoing rapid industrialization at the time, suffered a greater impact than during the first oil shock. As a result of the second oil shock, the Korean economy recorded a negative growth rate (-1.6%) for the first time in 1980.

The global economy is once again caught in an oil shock. While the first and second oil shocks were caused by a sharp rise in international oil prices, this time it is the opposite?a plunge in oil prices?leading to what is called a "reverse oil shock." Similar reverse oil shocks occurred in 2014 and 2016 due to decreased oil demand amid economic downturns and the production of oil substitutes such as shale gas. The second reverse oil shock was triggered by the novel coronavirus disease (COVID-19). Industrial activities were halted due to COVID-19, reducing crude oil demand. The plummeting international oil prices even recorded negative values for the first time ever on the 20th.

The unprecedented negative oil price situation has also caused turmoil in the domestic stock market. Securities firms' home trading systems (HTS) failed to recognize the negative oil prices, causing losses to investors. Individual investors betting on a rebound in oil prices flocked to derivative products such as exchange-traded notes (ETNs) and exchange-traded funds (ETFs) based on crude oil, leading to overheating.

As speculative demand surged and the premium/discount rates of related products widened significantly, financial authorities issued warnings about the risks. The Financial Supervisory Service issued the highest-level consumer alert, a risk warning, for four leveraged West Texas Intermediate (WTI) crude oil futures ETN products. The Korea Exchange also issued an unprecedented warning that if the underlying asset (WTI crude oil futures) falls by more than 50%, the indicative value could drop to zero, posing a risk of total loss of investment capital.

Retail investors, who had been praised for becoming smarter by heavily investing in large-cap blue-chip stocks during the COVID-19 volatility, now face massive losses after turning their eyes to high returns in an instant. While high returns are important, safety must always come first in investing.

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