The Oil Industry and the Saudi Stock Market

Saudi Stock Market

Saudi Stock Market is the biggest stock market in the Gulf region. It has a present market capitalization of about $325 billion and comprises a diversified group of industries, many of which are centred on the well-built domestic economy. Some of the industries in the Saudi stock market include the agriculture and food industry, Petrochemical industry, Retail industry, Hotel and Tourism Industry, Bank and Financial Industry, Cement, Transport industry, Oil industry and Building and Communication industry among others (Ramady, 2010). This paper will discuss the Oil Industry and the Saudi stock Market by analyzing the performance of this industry in the Saudi stock Market.


Performance of the Oil Industry in Saudi Stock Market

Oil industry in the Saudi Stock Market is the largest distributor of liquid oil to the oil consuming states in the globe. It adds to almost 13% of the overall oil production in the globe. Oil makes up to about 90% of the country’s exports and almost 75% of government proceeds. Even though Saudi Arabia is largely an oil- rooted economy, its stock market does not have a strong relationship to the international oil market. All the companies registered in the stock market do not give straight access to the oil business. However, the shareholders are capable of getting an exposure to the oil industry via companies whose charges move moderately closer in sequence with oil prices or who function in regions that are associated with the oil industry.

Performance records of the oil industry in Saudi stock market show that the general total oil production in 1985 amounted to 6.3 million metric tones but by the year 2008 up to present, this had reached 56 million metric tones. The performance of this oil industry has therefore improved for the past five years although fluctuations have occurred throughout the industry. This has mostly been attributed to the changing oil prices in Saudi Arabia.

A study carried out to investigate how shareholders could acquire exposure to the oil industry via the Saudi stock market showed that two approaches have been put in place. The first approach was by examining the relationship of the sector and private company share charges with oil prices. The second approach involved scrutinizing the listed companies that distribute ARAMCO directly or whose work is highly affected by oil supply. To do this, monthly data was used over the past five years. All the listed groups of oil dealers and related contractors were not found amongst the companies whose charges had the highest association with the oil prices. It has also been shown that Tadawul All-Share Index (TASI) correlation to oil charges for the last five years is 0.681. Given the reliance of the market on oil prices, this is not strong though the necessary actions are being taken to make this value higher than that (Giovanis, 2010). 

Market condition of this industry in the past was poor but has shown some improvements in the present. Possible predictions of this industry in the future are stipulated to amount to about USD70 billion in the 2020’s

Evaluation of the Oil Industry

Overall evaluation of this oil industry for the last five years has had an apparent divergence. In the past, this industry has faced problems of slow growth. For instance, in the 1980’s, the industry has faced low market conditions with its income shrinking by 58%.Triumphant diversification efforts which are being done at present have helped the industry to record a growth of 20%. For instance, in 2006, World Texas Intermediate (WTI) reached a pricing model of only $60 per a single oil container. By the time this reached its climax at 2008, with a pricing model of $ 150, TASI had dropped to 9500.

Two sectors in the Saudi stock market have been shown to have a momentous stronger relationship to oil prices. This includes the Petrochemicals and the Industrial Investment. Charges of petrochemical products have a close connection with oil prices. Consequently, fluctuations in oil prices affect the profit margin of the petrochemical industry. The relationship between oil prices and Industrial Investment sector is less strong. Some companies however have a negative relationship with the oil industry. This correlations are greater than 0.75. This means that their share charges tend to move in a reverse direction to those of oil.

The short-term position of the oil industry in Saudi stock market is sensibly good given the strong external demand and the vigorous government spending, expected to support the organizations income growth. In the medium term, this market will be kept up by the inspiring economic and fiscal fundamentals and further enhancements to the regulatory constitution. Foreign investments in this market are anticipated to improve. This should improve clearness and stability.

Predictions for the future show that Saudi stock market should get involved in purchasing international oil companies. This is a more appealing way of acquiring exposure to oil. Oil prices have remained high by chronological standards. It has been confirmed that oil prices do not bear an important short term bearing on the nation’s financial status compared to its effect on customer confidence and shareholder investment.

Risk of the Oil Industry with respect to the market

As the Saudi stock market becomes more and more open to international investors, it has in addition become more susceptible to distresses associated with foreign markets and thus more unpredictable. Frequent fluctuations in oil prices have so far occurred due to lack of firm regulatory measures in the stock market, publicity and spread of rumours.

Furthermore, since Saudi’s economies rely largely on crude oil revenue, the unpredictable nature of oil prices has fuelled tremendous stock price changes. As a result of this fluctuations, it is significant to evaluate risks in these market using approximation techniques that consider some of the practical regularities such as high unpredictability that exemplify asset markets in up coming economies.

In this paper, a systematic risk approach that displays the sensitivity of the risks Saudi’s oil industry will be used. The hypothetical justification of this systematic approach is based on the Capital Asset Pricing model (CAMP). This breaks down risk into organized risks and systematic risks, frequently referred to as beta factor. CAMP analysis of this oil industry shows that there have been positive mean proceeds. Negative skewness functions realized during the CAMP analysis show the likelihood of disapproving investments in this industry. The greatest and least statistics show that Saudi’s oil industry presents the highest unpredictable returns. This can also be revealed in the greatest standard deviation figure. The additional Kurtosis coefficient signifies the probability of intense gains and losses in this oil industry. CAMP analysis also approximates severe losses and gains commonly referred to as the lower and upper tail indices correspondingly (Cordesman, 2009). Approximation of these tails in Saudi’s oil industry shows that the chances of occurrence of extreme losses and gains are evenly possible. On the other hand, such even chances of severe losses and severe gains are not perceptible in Saudi’s oil industry. These points towards the fact that this industry faces higher probabilities of tremendous losses compared to the gains. In contrast with all other Saudi’s industries, the oil industry demonstrates a higher possibility of major extreme losses but with little gain prospects.

It is therefore clear that the oil industry in Saudi stock market is more vulnerable to extreme losses and the length of investment period is a significant factor in strategic risk management in the industry. This can be attributed to the fact that intense loss exposure rises with increasing duration of the period of holding an asset. Beta coefficients in CAMP show the sensitivity of the oil industry to international shocks. Consequently, a portfolio of beta which is larger than one is considered as more susceptible to fluctuations in the global economy. In view of the fact that the mean beta values for the Saudi’s oil industry to a large extent exceeds the overall composite index, which is a single unit, it seems the oil industry is the most vulnerable to external shocks among the other industries. It can also be recognized that the outcome of the oil industry on risk in Saudi stock market is very negligible (Antill & Arnott, 2000)

Table showing systematic risk estimates of the oil industry in Saudi Stock Market:

Mean 0.10
Standard Deviation 0.01
Minimum -0.04
Maximum 0.06
Skewness -0.064
Excess Kurtosis 8.6


Antill, N., & Arnott, R. (2000) Valuing Oil and Gas Companies: A Guide to the Assessment and Evaluation of Assets, Performance and Prospect. Cambridge: Woodhead

Cordesman, A.H. (2009). Saudi Arabia: national security in a troubled region. Santa Barbara, Calif: Praeger Security International.

Giovanis, E. (2010). Application of Capital Asset Pricing (CAPM) and Arbitrage Pricing Theory (APT) Models in Athens Exchange Stock Market. Mucnchen: GRIN Verlag GmbH

Ramady, A.M. (2010). The Saudi Arabian Economy: Policies, Achievements, and Challenges. Berlin: Springer.