Oil Prices and Performance of Stock Markets - Essay Example

How the changes in oil prices affect the performance of stock markets of the GCC countries ID Number of words Executive Summary This paper discusses the relationship between stock market prices and the oil prices. Crude oil prices significantly fell over the past few months from a high of $110 to a low of $50 per barrel in 16 December 2015. This movement in oil prices was reflected by a movement in stock market prices. There are studies in the past that have researched quantitatively on the relationship between stock prices and oil prices in the GCC. There are conflicting results on the impact of oil prices on the stock markets, though the paper focused on the short-term in the bourses of the six countries. Table of Contents Introduction 4 How GCC Stock Markets Respond to Movements in Oil Prices 5 Analysis of the effect of oil price changes on stock prices of Qatar Exchange relative to the region and the world 5 Recommendation 6 Conclusion 6 References 7 Introduction Global oil prices significantly fell sharply over the past nine months and this lead to considerable reduction in revenue for many countries exporting the product. The prices have fallen from an all time high of $110 a barrel to a low of $60 a barrel, a significant difference if $50 for a barrel. The trend in the fall of price of oil per barrel is likely to continue as the produced countries have resisted attempts to reduce the production that may increase the price of oil. Economists point to the surge in the United States production and tame economic growth in many countries as the leading causes of the oil price fall. The dynamic nature of oil prices in history has often been linked to stock prices. The ultimate way to validate, the assertion that the stock prices can be the result of changes in oil prices is only through empirical research. Most of the research on the relationship between these two variables are normally in the Western developed countries, and yet oil forms a significant part of the economy of the GCC countries (Alabdulwahab, 2008). The relationship between changes in oil prices and stock markets in GCC countries are important for other significant reasons, other than the one mentioned above. These reasons include the specific characters of their GCC stock markets demands a deep understanding of the underlying oil to equity market relationship (Asia, 2012). The Gulf Cooperation Council, formed in 1981, and it comprises the six countries of UAE, Bahrain, Saudi Arabia, Oman, Qatar, and Kuwait (Arouri, Bellalah and Nguyen, 2011). This paper is a report that shall present the manner in which the changes in oil prices affect the performance of stock markets of the GCC countries How GCC Stock Markets Respond to Movements in Oil Prices Markets in the GCC have reacted sharply to the changes in the oil prices from July 214 to January this year. The last time the prices of oil peaked was September, and since that day the price of oil has fallen drastically by more than fifty percent. GCC stock market followed suit prices in the main indices for the respective nations of GCC that are depend on oil, and much less for Oman a country that depends less on oil export. The fall of fifty percent in oil prices was reflected by a subsequent fall of the MSCI GC index by approximately thirty percent. It is vital to have in mind that the information reported in respect to the relations between stock markets and oil prices are real, and valuations often consider the attractive 216 PE multiples trading at 11.3x, versus 13.8x for both 2012 and 2013 in the same order. The price of crude oil is affected by the variations and relative balance of supply and demand and this is intimately watched by economists who perceive the price of oil as some of the instrumental indicators of the prevailing economic conditions (Arouri and Rault, 2010). Analysis of the effect of oil price changes on stock prices of Qatar Exchange relative to the region and the world The prices of the Abu Dhabi SE from a price of 4861.74 on November 2014 to a low of 3892.08 on 16 December 2014, before marginally rising to a price of 4330.63 and by April 15, the price had settled at 4623.2. The prices in Bahrain SE has followed the similar pattern as that of the Abu Dhabi SE, as the prices fell from a high of August 7th 2014 at 1487.321 and fell sharply to 1382.412 on December 18th of the same year, and then marginally rising to 1476.755 on March 15th 2015. The Dubai FM a stock fared not as much as the cases mentioned above, the price falling during the same period and rising to the same rate just as the bourses mentioned above. The Kuwait SE was at a price of 6170.93 on December 16 2014 from a high of 7655.57 on September 25 2014. From the December 16th price, the price rose marginally over the couple of time and thereafter fell marginally to 6221.37. The prices in NASDAQ Dubai fell to 3116.35 at the close of December 16 2014 from a high of 4411.28 on November 24 2014. The Qatar SE followed the same pattern as the price fell to 11057.33 on December 16 214 from a high price of 14006.46 on September 23 2014. After the December 16 2004, prices the prices marginally rose over the next few days settling at 11987.71 on the close of April 9 the 2015. The Saudi Bourse also followed a similar pattern falling from a high of 11149.36 on September 9 2014 and fell to a low of 7730.3 on 16 December 2014, and thereafter marginally rose to settling at a price of 8733.79 on 2 April 2015. Recommendation The cause that leads to fall in the performance of stock markets of the GCC because of oil price shocks are quite ambiguous and mostly unknown, but the best way to tackle this problem is to ensure that bourses run efficiently. Market efficiency is often the answer to problems that arise from positive relationship from oil shocks and market prices. Conclusion A rise in oil prices often shows the inflationary pressure in the GCC, and this in turn leads to significant transformations in interest rates and investments. Hence, corporate profits, returns, domestic price levels, and stock market share prices in the GCC are affected by oil price movements. In Qatar much like other countries in the GCC, as they are net importers of oil, but export the crude oil. The expected link between the oil prices and stock markets is negative, and the processes for conveying oil price shocks to stock market reruns in the region lacks form, and the entire impact of oil price shocks on stock returns depends on either positive and negative effects. References Top of Form Alabdulwahab, S. Z. (2008). Three essays on financial markets and monetary behavior in GCC countries. Bottom of Form Arouri, M. E. H., Bellalah, M., & Nguyen, D. K. (December 01, 2011). Further evidence on the responses of stock prices in GCC countries to oil price shocks. International Journal of Business, 16, 1, 89-102. Arouri, M. E. H., & Rault, C. (2010). Oil prices and stock markets: What drives what in the Gulf Corporation Council countries?. Munich: Univ., Center for Economic Studies. Asia, D. I. M. F. M. E. C. (2012). Regional Economic Outlook, November 2012. Washington: International Monetary Fund. Read More