"If Low Oil Prices Prolong, Financial Market Instability and Price Deflation Concerns Arise"

Bank of Korea Overseas Economic Focus

[Image source=AP Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] An analysis has emerged suggesting that if the low oil price situation continues due to the economic recession and the impact of the novel coronavirus disease (COVID-19), the international financial market could also become unstable.

On the 7th, the Bank of Korea stated in its 'Overseas Economic Focus' report, "If the low oil price situation persists, economies of oil-producing countries with weak fundamental economic conditions may deteriorate, negatively affecting the global economy. Although the immediate direct and indirect shocks to the world economy may be limited, if oil-producing countries withdraw overseas investment funds in response to worsening fiscal and current account balances, this could amplify instability during times of international financial market turbulence."

It also expressed concerns that prolonged low oil prices could worsen the shale industry’s business conditions and increase defaults among shale companies, potentially hindering the U.S. economic recovery. However, it added, "Considering that major financial institutions do not have a high loan exposure to the U.S. energy sector and that U.S. policymakers are actively providing liquidity support, the possibility of shale industry defaults leading to widespread financial instability is limited."

Additionally, the Bank of Korea noted that the low oil price trend, combined with global low inflation trends and unprecedented economic recessions, could increase downward pressure on prices, especially in major countries, warranting close attention.

According to the report released that day, international oil prices from January to April this year plummeted to their lowest levels in about 20 years since the early 2000s. In April, the Dubai crude oil price was $23.3 per barrel, marking the lowest point since November 2002. It fell to about 79% of the price at the beginning of the year, showing a decline surpassing previous crises such as the 1997 Asian financial crisis and the 2008 global financial crisis.

Most major institutions expect international oil prices to remain in the $30 to $40 per barrel range this year and next year. The U.S. Energy Information Administration (EIA) forecasts international oil prices at $34 per barrel this year and $48 next year, while the UK’s Oxford Economics projects $38 this year and $44 next year.

The Bank of Korea stated, "As long as concerns about the resurgence of COVID-19 persist, it will take considerable time for crude oil demand to recover to previous levels," adding, "Increased global downward pressure on prices could have negative ripple effects on the world economy and international financial markets."

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