While the stock market has grown more resilient to the risk of war in the Middle East, international oil prices have continued to soar, and losses for individual investors who bet on a decline in oil prices are snowballing. As prices have effectively entered a range where it is impossible to recover losses, and even forecasts for international oil prices are being revised upward, investors' despair is deepening.
◇ Bet on a decline with crude oil "gearing inverse" ETNs… principal recovery "effectively impossible" even if oil prices fall
According to the Korea Exchange (KRX) on the 28th, from the 3rd of last month, when the war broke out, to the 27th of this month, the top five exchange-traded notes (ETNs) by net purchases from individual investors among crude oil-related products were all "gearing inverse (2x inverse)" products. Individuals convinced of a drop in oil prices funneled as much as 230 billion won during this period, concentrating on bearish bets.
By product, "Samsung Bloomberg Inverse 2X WTI Crude Oil Futures ETN B" drew 115.4 billion won to rank No. 1 in net individual purchases. About 51.3 billion won flowed into "Samsung Inverse 2X WTI Crude Oil Futures ETN," and around 20 billion won each into "KB S&P Inverse 2X WTI Crude Oil Futures ETN B" and "Shinhan Bloomberg Inverse 2X WTI Crude Oil Futures ETN B."
However, even as war tensions eased, international oil prices hovered around $100 a barrel, causing losses on those products to balloon. During this period, "Samsung Bloomberg Inverse 2X WTI Crude Oil Futures ETN B," the No. 1 net purchase, fell 74.49%, and the No. 2–5 net purchase products also dropped 72–75%, with most products plunging.
As the declines deepened, they have now entered a zone where recovering losses is difficult. For inverse products, once there is a steep drop, the principal cannot be recovered even if prices rebound by the same percentage. In particular, for "gearing inverse" products that move inversely at twice the underlying asset's volatility, losses are amplified twofold, making the threshold for recovery even higher.
For the Samsung Inverse 2X WTI Crude Oil Futures ETN, a buyer on the 3rd of last month would need the ETN price to rebound 257.9% at the close to recover principal. Converted into the 2x inverse structure, that implies international oil prices would have to drop more than an additional 120% from current levels. Unless oil prices fall below 0 won, this has arithmetically entered an impossible range.
◇ Concern about early redemption if oil prices surge… forecasts for international oil prices keep rising
The structural risks of ETN products are also a burden. For some crude oil inverse ETNs, if prices fall a certain level below the base price, they carry early redemption (automatic liquidation) conditions, raising concerns that if losses mount further, a situation close to a "forced liquidation" could occur.
Under exchange regulations, early delisting may occur if any of the following apply due to underlying asset price movements: ▲ if the real-time indicative value per security (IIV) at the close of the regular market falls 80% or more compared with the previous closing price ▲ if the closing IIV is below 1,000 won ▲ or if it is deemed that investor protection is otherwise necessary.
The Samsung Inverse 2X WTI Crude Oil Futures ETN listed before the revision of the relevant rules is not subject to this provision, but the other four top net-purchase products are subject to early redemption rules. Fortunately, the IIVs of those products are currently around the 3,000 level, so the risk of immediate early liquidation is low.
However, on the 9th of last month, when WTI topped $100 a barrel for the first time in about 2 years and 8 months, the IIVs of those products plunged 35–45% in a single day. If international oil prices surge again, the IIV could drop sharply in a short period, potentially approaching early redemption conditions.
That said, the outlook for oil prices ahead is grim. According to the Financial Times (FT) on the 27th (local time), global investment bank (IB) Goldman Sachs said that if the blockade of the Strait of Hormuz continues through July, international oil prices in the second half could rise to $120 a barrel. Even if normalcy returns by the end of June, it projected trading at an average of $90, higher than the previous forecast ($80).
A person in the financial investment industry said, "If the direction is wrong, losses on leveraged and inverse products can expand quickly, and in highly volatile periods, losses accumulate," adding, "For assets like oil that are heavily influenced by geopolitical variables, it is difficult to time short-term moves, so individual investors should be cautious in their approach."