Investment and Stock Market: The Effect of Continuous Of Downtrend of Oil Price on the Industries’ Of Saudi Arabia Stock Market
More than 70% of the Saudi Arabia comes from oil production and exportation. The reviewed literature reveals that continuous drop in the price of oil in the international market affects the Saudi Arabia Market significantly. In order to verify this, the study will use the linear and nonlinear regression methods which will try to establish the correlation that cross-cut between the performance of the Saudi Arabia market (as represented by the market TASI proxy) and the prices of oil. The research will be expected to be carried out in a period of three years.
The oil industry has a history of boom and busts, but it is currently in its deepest downturn since the 1980s, causing scores of companies to go bankrupt, more than 250000 oil workers to be laid off, oil companies to sharply cut investment in production and exploration and others to decommission more than 75% of their rigs (Zhu, et al., 2016). The rising supply with the falling demand for oil has seen its price fall in the international oil market from $115 a barrel in 2014 to about $28 per barrel currently, which has a devastating effect on the economies of the oil-exporting countries such as Saudi Arabia, Russia and Venezuela (Zhu, et al., 2016). A country like Saudi Arabia earns $360 billion years in net oil export when the international price of oil is trading at $115 barrel, and with the oil price hitting below $30, the erosion of the revenue from the oil has affected the country’s economic performance and internal markets in a big way. According to Owen, Inderwildi and King (2010) oil price can be defined as the spot price per barrel of the benchmark crude oil (e.g. OPEC Reference Basket, West Texas Intermediate (WTI), and Urals oil), which is used as the reference price for the buyers and sellers of the crude oil. Amongst the most affected economic sectors by the drop in the price of oil is stock markets of the country’s that are highly dependent on income from oil.
A stock market refers to the market where the shares of publicly owned companies are issued and traded either through the over the counter markets or exchanges (Awartani & Maghyereh, 2013). The stock market is also referred to as the equity market, and it plays an instrumental role in the free-market economy by providing companies with capital that are given in exchange for a portion of ownership in the issuing company (Reboredo & Rivera-Castro, 2014). The price of the stock affects the ability of the company to raise enough that will facilitate its growth and expansion program. The stock price is affected by fundamental factors such as economic performance, industry trend, future projections, company’s performance, regional security and stability and the political and governance stability. This means that any factor that will affect the economy or performance of the company will ultimately affect the price of the stock and the aggregate stock market performance (Zhu, et al., 2016).
This means that the stock market has a direct correlation oil price, especially in countries whose revenue is mainly from the sale of oil. This has been the case in the recent oil price fall in the stock markets of country’s that Russia, European countries, and Saudi Arabia. For example, the falling oil prices have caused Russian stock market to fall with Micex equity index dropping by more than 6.2% since 2014 and the share price of the country’s largest banks Sberbank and VTB falling by more than 4.8%. In the European stock market, the pan-European FTSEurofirst 300 index has fallen by more than 3.1% to its lowest level since October 2014, and the Germany’s DAX has fallen by 24% since April 2014 as the price of crude oil (black commodity) fell by more than 55% of the period. This illustrates the direct correlation that the stock market has with the oil price (Reboredo & Rivera-Castro, 2016). Given the recent oil price plummeting and its devastating effect on the economies and stock……………………….