Sample Term Paper On Analyze The Effect Of Oil Price Changes On Stock Markets Of The GCC

Executive Summary

For the past few decades, the world has been facing a problem of oil price fluctuation. In most cases, an increase of the oil price has been considered as a devastating problem hindering economic activities among others. Other studies suggest that high oil prices are the economic slowdown in the major global economies. The economists argue that this increase in global oil price has been linked to the international unrest, escalating demand, natural disasters, restrictive registration, and speculative buys. This study provides an insight of the oil price impact on the GCC countries and more specifically in Qatar Stock Exchange, comparing it with the other countries’ stock markets.

Introduction

In the previous months, the world has anticipated a relief due to the tremendous decrease in oil prices. For instance, between July 2014 and January 2015, the oil prices devalued by over 40 percent. This decrease resulted in 10 percent decrease in the oil prices, which made the researcher compare this period with the Black Monday on October 19th, 1987, where the stock market crashed. According to Stefanova (2014), “the price of crude oil at $55 which ultimately drives the prices at your gas station in at a record five-year low and has fallen over 40% in six months.” This indicates that the price in the global oil market is significantly falling. However, the main concern is how is this decrease in oil prices affecting the stock market?

How GCC stock markets behave as a response to the movements in oil prices

The GCC is the Gulf Cooperation Council, which consists of six country members; Kuwait, Bahrain, Qatar, Oman, United Arab, and Saudi Arabia. The GCC are different from other countries because they are heavily segmented for the global equity markets, and they are considered sensitive to the regional political unrest. Various studies have indicated that there is a significant relationship between the stock returns and the oil movements and volatilities. The studies show that the changes in the oil prices transmit its impact on the GCC stock markets through the impact on the relevant macroeconomic variables. Therefore, this indicates that there is a linkage between the stock market prices and the oil prices. In theory, the value of the stock is equated to the discounted sum of the anticipated future cash flows. As a result of the oil shock, the macroeconomic variable changes leading to the change in these cash-flows.
GCC countries are considered to be heavily affected by the shock of the oil process because of the various reasons. First, the countries are the main producers and suppliers of the oil in the global energy market, and this make them heavily susceptible to the movement of oil prices. Second, the GCC countries are different from the other countries and are isolated from the global equity markets and volatile to the regional political instabilities. Finally, the countries are considered to be potential regional and international portfolio diversification. For this reasons, there is a substantial link between the oil price movement and the stock returns in the GCC countries.
Analysis of the effect of oil price changes on stock prices of Qatar Exchange relative to the region and the world.
According to Buttonwood (2014), the falling prices of the oil in the global market has a significant effect on the stock market by having balance positive for equities. For instance, 12 months after 25 percent fall in crude oil in 1970, the global equity gained returns of 19 percent in the real terms (Buttonwood, 2014). The fall in the oil prices is anticipated to foster the economic activities and specifically the oil incentive industries. As a result, since the increase in economic activities have a positive effect on the stock market, the stock return are expected to increase. However, while some major producer of oil such as Saudi can bare the low prices of oil, small producers such as Venezuela, Iraq, and Iran are heavily suffering from the fall of the oil price. For countries like Saudi Arabia, they are willing to keep the oil prices down in order to maintain competitive prices and hence competitive advantage. However, in some markets the stock market has reacted adversely to the falling prices of oil. For instance, in the American Economy, the broad market has lost 2 percent of its value alongside with the fall of the oil company shares.
Similar to the Saudi’s case, the drop in the oil prices is anticipated to have no impact on the Qatar’s economy because the country has been operating with a conservative budget. This is confirmed by the rating agency report released by the Standard & Poor that revealed how UAE and Qatar are the least vulnerable to oil price movement and volatility. Contrary, other countries such as Bahrain and Oman will be most affected economies by the fall of the oil prices. Due to the conservative budget Qatar economy has shown stability in the previous years despite the shock in the oil prices. For instance, in the 2012-13 budget, the country expected low export price of $65 per barrel, but the average export during that period reached almost $110 per barrel (Buttonwood, 2014). In addition, according to Mirhaydari (2014), the fall of oil prices increases efficiency that has reduced the breakeven cost for many wells, ranging from $50 to $70 per barrel. Therefore, due to this economic stability, the fall of the oil prices is anticipated to have no effect on the country’s stock exchange contrary to many countries in the world.

Recommendations

Despite the negligible impact of the fall of the oil prices in the GCC countries, it is anticipated that in the long-term the market will suffer if the prices will continue falling. This is because, the price shock will affect the macroeconomic variables in the economy that will be reflected in the liquidity of such, markets. Therefore, the GCC countries need reduce the oil prices in order to push up the oil prices. As a result, this is anticipated to boost the stock market in the long-term. In addition, countries affected by the price shock should invest in portfolio diversification, arbitrage, speculation, and hedging strategies in order to counter this shock.

Conclusion

It is evident that price shock has a significant impact on the stock market. However, the effect of the low oil price varies across different countries. For example, the oil producing countries that are poor are expected to experience a greater impact than countries that are rich such as Qatar, and Saudi Arabia. Such countries can sustain the low prices because they take advantage of low and competitive prices.

References

Bermingham, F. (2014, November 11). Qatar Claims Oil Prices Have No Effect on Economy. Retrieved from http://www.ibtimes.co.uk/qatar-claims-oil-prices-have-no-effect-economy-1474204
Buttonwood. (2014, November 28). Oil and the markets: Black gold Friday | The Economist. Retrieved from http://www.economist.com/blogs/buttonwood/2014/11/oil-and-markets
Stefanova, K. (2014, December 31). Do Falling Oil Prices Foreshadow a Slump in the Stock Market in 2015? - Forbes. Retrieved from http://www.forbes.com/sites/katinastefanova/2014/12/31/do-falling-oil-prices-foreshadow-a-slump-in-the-