Saudi Arabia has proven oil reserves of 264.52 billion barrels of oil (OPEC, 2011) and recently surpassed by Venezuela who claimed their oil reserves had risen to 269.5 billion barrels of oil. In terms of oil production, Saudi Arabia has a quota allocation of just over 30% of production among Organisation of the Petroleum Exporting Countries (OPEC) countries. The Saudi Arabian oil production in 2010 was 9.1 million barrels per day which accounted for 13% of world’s total oil production. Oil is the major driver of economic activity in Saudi Arabia. Oil related activities accounted for 47% of the GDP in 2010 (MoF, 2011), and petroleum products exports amounted to $193 billion and accounted for 84% (by value) of total exports in Saudi Arabia (OPEC, 2011). Therefore, oil prices play a vital role in the Saudi Arabian economy. However, from the perspective of an investor or an enterprise in Saudi Arabian market, it is also important to know whether oil prices have a major role to play in stock prices of non-oil sector companies too. If there is a high positive correlation between oil prices and non-oil sector stocks, an investor can use these stocks to hedge on their investments in oil. The outcome of this study could therefore be very useful for foreign investors and enterprises already present or planning to enter the Saudi Arabian market. Clarification of Terms and Concepts Aggregate Demand: The total demand for goods and services in an economy for a specified time period and at specific price levels is called aggregate demand. It is made up of 4 major components – consumption or consumer spending, investment, government spending and net exports. Correlation: A statistical measure that describes how two variables move together with each other. The coefficient of correlation has value between -1 and 1. A positive value means the two variables move in the same direction simultaneously. The closer the value is to 0, the lesser relative movement they have. Disposable Income: The amount of money that the households in an economy have for spending and saving after taxes have been deducted from their total income. It indirectly measures the potential for consumer spending in the economy. Downstream (oil industry): The downstream activities in oil industry refer to refining and distribution of natural gas and products refined from crude oil. Exchange rates: The rate at which two currencies can be exchanged for each other. Essentially, it is the price at which one country’s currency can be exchanged for another country’s currency. Granger-Causality test: A statistical test used to measure whether change in one variable causes a change in another variable. Granger-Causality tests relationship between two variables. This methodology is employed to test the causality of each variable for the other and establish which variable causes change in which variable. The key principle used is that the independent variable is better able to predict the dependent variable than when taking only the lagged values of the dependent variable to predict it. Hedging: A risk management strategy used to limit or offset probable loss from fluctuations in an investment. For a risky investment made in an instrument, hedging is the strategy to invest in another investment that is expected to provide a positive return when the main investment starts to yield a negative return. Market
Do Oil Prices influence Non-Oil Sector Stocks in Saudi Arabia? Name University’s Name Table of Contents Abstract Introduction Oil is one of the most important economic resources in global economy today. Fluctuations and shocks in oil prices have been studied extensively by many leading economists…
This research helps to better determine the role oil prices play in the Saudi Arabian stock market. The results of this research could be significant for investors and enterprises in determining their hedge on their oil investments and could serve as a basis for further research and verifying its validity in other major oil producing countries, and in determining the direction their stock portfolio is expected to go in depending on oil prices.
The key assumptions in the study are: 1)The stocks chosen for analysis are representative of the sectors as they account for most market capitalisation in each sector; 2) By studying the causality relationship between oil prices and stock prices, we can reliably conclude on the influence of oil prices on stocks; 3) The impact of oil prices on stock prices is a constant phenomenon and not a “one-time” effect or a switch-on/switch off effect.
Therefore, for developing comprehensive study on Saudi Stock Market various aspects have been explored with evaluation of events in the market relative to events in world. Upon analysis, it was explored that world oil prices have direct impact on the TASI while internal country strength resists the impact of Asian crises on market.
Saudi Aramco through its management of 98% of the countries oil resources (Jaffe and Elass 2007) has had a significant impact on the Saudi Arabian Society. Saudi Aramco has had a history of improving the lives of Saudis whose livelihood in the past were dependent mainly on agriculture, making oil a very important commodity in the Saudi Arabian economy.
Literature Review 11 IV. Research Methodology 19 VII. Results and analysis 22 VIII. Conclusion 24 References 25 Appendix 1: Tadawul stocks and sectors distribution 27 Appendix 2: Stocks to be used for Analysis 28 Abstract This research analyses the degree to which oil prices influence non-oil sector stocks in Saudi Arabia.
In such an environment, being complacent or relying on one decisive strategy can lead to failure for even well established and strategically sound organizations. SKA-ARABIA Oil Company has carved out a place for itself in the world’s fuel, aviation and logistics market by providing crucial services in unstable and often dangerous environments of Iraq and Afghanistan.
Saudi Arabia is one of largest nations in the world with an area 870,000 sq mi. It is located in Western Asia, and it is the 2nd largest Arab nations following Algeria. The population of the nation is estimated to be 29 million and a majority of them are young people.
Under nutrition, as well as chronic hunger, mainly arises from widespread poverty. Individuals who are poor cannot afford to buy food. Hungry households use more than half of their income to purchase the