South Korea is facing an increasing level of oil money exit risks in its stock markets, with the crude-producing economies bracing against falling global oil prices and struggling Chinese economy, a Korean brokerage house said on Wednesday.

According to a recent report compiled by Shinhan Investment Corp., the oil producing economies’ total investment in Korean stocks on Nov. 30, 2015, slipped to 30.7 trillion won, down 10.6 trillion won or 25.7 percent from July 31, 2014.

“The biggest exit came from Saudi Arabian national wealth fund, having reduced 32 percent of its possession of Korean stocks during the same period, far more than 25.4 percent of Norway and 14.9 percent of the UAE,” the report said. The exit of oil money has been remarkable, it said, considering that the possession of Korean stocks by all foreign investors, oil producers and non-producers combined, fell only 6.5 percent during the same period. 

“The crude producing countries are seen trying to fill in for widening revenue gaps from the investments made by their national wealth funds,” Shinhan Investment said in the report. For the United Arab Emirates, military intervention in the civil war in Yemen, along with its refusal to curb oil production, is causing an immense revenue gap, it added.

The oil money exit is triggered by the falling oil prices, which barely bounced back from the 12-year-low of $30 per barrel mark on Wednesday, on lackluster global trade and Iran’s imminent reentry to the crude market.

Shinhan analysts estimated that the oil money exit can cause fresh uncertainties in the global financial market. With rising volatility in Chinese markets and the aftershock in global equities has made Asian investment look riskier, they said.

Shinhan expected Korea, Japan, the Middle East and North Africa at the top of the exit list of these national wealth funds, mostly from Norway, United Arab Emirates, Saudi Arabia, Qatar and Kuwait. As of June, 2015, the total assets held by these five national wealth funds stood at $3.2 trillion won, approximately 6 percent of which was invested in Japan and 2 percent in Korea.

Shinhan estimated that the oil money exit will likely continue throughout the first quarter of 2016, as Iran oil is expected to enter the global market within the first quarter. Estimates of Iran oil production vary, from 200,000 barrels to 1 million, it wrote.

“The downside pressure of crude prices is expected to continue throughout the first quarter of this year, considering larger supply from Iran, uncertainties about the speed of the U.S. rate hike and seasonal factors on U.S. crude in stock,” the report said. 



By Chung Joo-won (joowonc@heraldcorp.com)