Port Report-Oil Prices and Stock Market Behavior - Essay Example

Port Report-Oil Prices and Stock Market Behavior ID: Number of words: 1172 Executive summary This paper describes briefly about the relation of global oil price changes with the GCC stock market behavior. As Gulf countries are responsible for bulk of global oil production and distribution, it is essential to understand the impact of international financial activities and cyclic changes in the oil prices for these markets. While doing so, the paper also deals, briefly with the subject of global stock markets’ volatility in relation to changing oil prices. Table of contents Introduction page Possible reasons for falling oil prices page Positive for global economy page Positive impact of falling oil prices on automobile stocks page Relation between GCC stock market behavior and oil prices page Saudi Arabia page Bahrain page Kuwait page Oman page UAE page Impact of oil price changes on Qatar stock market page Recommendations page Conclusion page Introduction The price of crude oil has gone down by almost 40 percent during the last six months of 2014. This resulted in the reduction of retail gas price from USD 3.31 to USD 2.27 during the year 2014. While this has the positive effect on the consumer purchase pattern, the impact of such fall on the investment pattern, particularly the GCC stocks needs detailed investigation. As it is just the first quarter of 2015, the analysis of current oil prices fall cannot be done correctly since its effect on stock investment needs longer period of observation. Hence, this paper has taken an in-depth look at the relationship between oil pricing and stock investment, as well as general economic conditions, within GCC and across the world, during the recent past. Accordingly, 2008 financial crisis, coupled with cyclic fall in oil prices finds greater attention in the following paragraphs. Possible reasons for falling oil prices As supply and demand equation determines the price of any commodity, political forces prevailing in the oil producing countries determine the supply position for oil, largely. Technological innovation also plays a major role here. Many political decisions by countries across the globe influence the oil pricing. For example, the cause of recent Russian currency debacle has relation to the falling oil prices. Although under normal conditions, falling prices would result in reducing the production, OPEC countries are not doing it, as they want to retain their control over oil production. This is also seen as an attempt to make oil production unsustainable by American producers, who are utilizing advanced technology to increase shale oil production in a major way.(Stefanova, 2014) Positive for global economy Consumers in Western countries take falling oil prices as an instrument to result in lesser tax burden. This way the falling oil prices prove to be positive for the global economy, as these countries can look for heavy reduction in lower inflation rates. While many advanced economies may go for deflation measures, the falling oil crisis has hit the currencies of Norway and Canada in a major way.(Buttonwood, 2014) Positive impact of falling oil prices on automobile stocks While other stocks may be waiting for the results of falling oil prices on their behavior, automobile manufacturers are enjoying the benefits. This is evident from an automobile company, Tesla Motors’ stock performance. The shares of this company have risen drastically by around 80 times, during the period from 2013 end to 2015 beginning.(Mirhaydari, 2014) . Relation between GCC stock market behavior and oil prices Considering the broader outlook of oil prices, in relation to financial activities, the global crisis of 2008 also resulted in drastic downside of oil prices. The oil prices fell from USD 140 to USD 40 per barrel during the last six months of 2008, which was the cyclic downside phase for oil prices. Studies conducted by Abdallah (2010) reveal the existence of an inverse relationship between the oil prices and the financial activity. The establishment of GCC in 1981 comprised of six countries that included Kuwait, Saudi Arabia, UAE, Oman and Bahrain. The combined oil exports by GCC were around 36 percent of world exports for this commodity. This has major impact on the financial activities of the region. (Abdallah , 2010) Studies conducted by Rizvi & Masih (2014) reveal the following information about impact of change in oil prices on the stock markets of each country. These countries share common features like dependence on oil and gas business, monarchy system of governance and similar policies towards fixed exchange rate. Saudi Arabia The impact of changing oil price shocks on the KSA stock market is not much, due to many reasons. These include ban on international investors to invest directly in the stock market, except through mutual fund route. Bahrain On the other hand, Bahrain stock market has thrown open its doors to international investors. This fact along with the relatively lesser dependence on energy trade has mixed impact on the country’s stock market from oil price shocks. However, Bahrain having service-based economy, the global economic slowdown affects its stock market behavior. With slowdown in the growth of country’s service sector, the international investor portfolio exposure is reduced or transferred to other countries. Kuwait With large dependence on oil based trade and country’s openness of its stock markets to foreign investors, the global reaction on stock market behavior is also passed on to Kuwait’s capital markets. (Rizvi & Masih , 2014) Oman Oman has the record of having debt free economy since last one decade. The country has also a sizable fund that has global investment exposure. However, Oman stock market has not attracted much of the international investment. UAE United Arab Emirates witnessed the worst crisis during the financial slowdown of 2008, which shows the close relation of oil price changes with the volatility of stock markets within UAE. In fact, the 2008 oil and financial crisis resulted in severe crashing of UAE’s GDP, as Dubai had almost reached nearly to being a sovereign default state. However, this position was saved by the timely action from Abu Dhabi, another part of UAE, which bailed out Dubai. Impact of oil price changes on Qatar stock markets Qatar has ranked among the top three countries, in terms of GDP, as oil and gas based business activities drive its economy. The country has 85 percent export earnings from such activities, while gas and oil account for almost 70 percent of government revenues and around 50 percent of GDP. Country’s stock exchange has grown drastically after 2008 with openness to international investors. (Rizvi & Masih , 2014) However, Qatar stock investments may not suffer due to the current oil price crisis, as the country’s economy is resilient to tolerate the shocks from current glut in oil supplies. Qatar has many infra structure projects, which can be completed with the sufficient resources available with the country. Hence, growth of non-hydrocarbon sector in the country will continue without any hindrance, thus driving Qatar’s economic further diversification. Although lower oil prices would result in lesser export earnings for the country, the government investment program for 2022 World Cup infrastructure projects will result in accelerated GDP growth, based on non-hydrocarbon business activities. This development will certainly prove positive for Qatar’s stock investment portfolio.(Arab news, 2014) Recommendations It is recommended that political intervention in oil production, particularly by the rulers of GCC countries should be curtailed, while market mechanism of demand and supply can play its role independently. This will reflect in genuine oil pricing. For averting crisis in oil pricing, as being witnessed currently, it is advisable that all oil-producing countries meet and discuss the issues involved across the table. This will enable GCC and OPEC countries to have access to advanced technology, which resulted in increased shale oil production by American producers. This will also ensure better understanding among the oil producing nations on the critical issue of identifying required oil production figures Conclusion While the falling oil prices are seen positive for the consumers, with lesser tax burden, the impact of such changes on the stock market behavior has been varied, for the GCC member countries. However, Global stock exchanges have not witnessed any major volatility due to falling oil prices, during last one year. Works Cited Abdallah, F. (2010). World oil prices and Stock Market Return. FPO Research and Communities Retrieved from: http://www.freepatentsonline.com/article/Journal-Academy-Business-Economics/261080977.html Arab News. ( Dec.2014). Qatar’s Economy to Remain Resilient.Arabnews.com Retrieved from: http://www.arabnews.com/news/674101 Buttonwood. (2014). Oil and the Markets. Economist.com Retrieved from: http://www.economist.com/blogs/buttonwood/2014/11/oil-and-markets MIrhydari.A. (2014). Will Cheaper Oil Burn Tesla. Thefiscaltimes.com Retrieved from: http://www.thefiscaltimes.com/Columns/2014/12/03/Will-Cheaper-Oil-Burn-Tesla Rizvi. A & Masih. M (2014). Oil Price Shocks and GCC Capital Markets. MPRA Publication, paper # 56993. Retrieved from: http://mpra.ub.uni-muenchen.de/56993/1/MPRA_paper_56993.pdf Stefonova. K. (2014). How Taxes and Trading Costs Kill Investment Returns. Forbes.com. Retrieved from: http://www.forbes.com/sites/katinastefanova/2014/10/20/why-taxes-and-trading-costs-kill-investment-returns/ Read More