On fears that a prolonged U.S.-Iran military clash could erupt, international oil prices soared and slammed Korea's stock market. Oil broke through $100 per Barrel, hitting a record high for the first time in about 3 years and 8 months. As the high oil price shock spread, Korea's stock market plunged more than 5%.
Unlike past cases where rising oil prices were reflected with a lag, this time the pace of reflection is unusually fast and the decline is steep, analysts said. Experts see the potential prolongation of a high oil price phase, rather than the rise itself, as likely to deal a more fatal blow to stock market fundamentals.
According to the New York Mercantile Exchange, on the 6th, April West Texas Intermediate (WTI) futures settled at $90.9, up $9.89 (12.20%) from the previous session. On this day, after surpassing $100 for the first time since July 2022 and extending gains, it was trading at $116 as of 1:43 p.m., up $25.1 (27.61%).
It is assessed that the prolonged U.S.-Iran conflict has driven up oil prices. As the Middle East war drags on, effective closure of the Strait of Hormuz, through which about 20% of the world's crude flows, has heightened concerns over supply disruptions. The United States said it would respond to resume navigation in the strait, but the market is questioning the effectiveness because no concrete measures such as escorts or insurance support have been presented.
On top of this, moves by major oil producers to cut output are amplifying supply jitters. Iraq announced a plan to cut 1.5 million barrels per day (bpd), and Kuwait also noted it could halt production and sales. Global investment banks (IBs) forecast that if the closure of the Strait of Hormuz persists, international oil prices could quickly exceed $100 per Barrel and potentially climb to around $147 within weeks.
As oil prices spiked, Korea's stock market slumped. On the 9th, the Korea Composite Stock Price Index (KOSPI) closed at 5,251.87, down 330 (5.96%) from the previous transaction day. As it plunged more than 8% intraday, a "circuit breaker" was triggered, halting trading for more than 20 minutes.
There is a view that volatility in this market has become far more extreme than during past oil price surges. Unlike before, when oil shocks were reflected with a lag, this time the downward pressure on stocks is immediate and explosive.
Jeong Hae-chang, a researcher at Daishin Securities, said, "In the past, rising oil prices affected the stock market as they led, with a certain lag, to economic slowdown and financial market instability," adding, "This time, with concerns about a U.S. economic slowdown already present, the oil price spike rapidly intensified inflation worries, which in turn immediately connected to stock declines."
The desire to take profits after a recent short-term rally also deepened the losses. Cho Yong-gu, a researcher at Shinyoung Securities, said, "With Korea's market having posted higher returns than global markets since the start of the year, the spotlight on the Strait of Hormuz risk increased relative pressure for a pullback." The impact appears to have been greater because Asia, including Korea and Japan, imports more than 80% of the crude and condensate that pass through the Strait of Hormuz.
Looking at past cases, a surge in oil prices did not necessarily lead to an immediate stock market decline. In 2008, during the earlier third oil shock, oil jumped from the $90 level in February to $145 in July, but the KOSPI instead climbed to the 1,800 level. Rather, from July, when oil moved sideways around $110, the KOSPI began to fall and slid to the 1,000 level.
In 2022, when the Ukraine-Russia war broke out, oil prices jumped first and the stock market decline followed. At that time, oil rose from around $90 per Barrel in late February to above $110 in early March, but the KOSPI climbed to the 2,700 level during the same period. The index then came under gradual downward pressure as concerns over high oil prices and inflation persisted.
Experts said the oil price spike itself can increase short-term stock volatility, but the market's direction will ultimately be determined by whether the war is prolonged.
If a high oil price phase lasts for an extended period, a preference for safe assets could strengthen and a stronger dollar could emerge, while rising inflationary pressure could lead to weaker consumption and higher expense for corporations. Analysts said that if this trend continues, it could also weigh on companies' fundamentals.
Cho Yong-gu, a researcher at Shinyoung Securities, said, "From the stock market's perspective, what ultimately matters is whether the war is prolonged," adding, "The longer the war drags on, the more it could flow into a worst-case scenario where concerns extend beyond inflation to tightening." However, "At present, when comparing the moves in U.S. Government Bonds yields and international oil prices, the size of the risk being priced by global markets is somewhat limited," Cho said.