16/05/2011
Oil and the Saudi stock market
According to a report by the Riyadh-based Jadwa Investment about “Oil and Saudi stock market”
JEDDAH: Although Saudi Arabia is predominantly an oil-based economy, the stock market does not have a close relationship to the global oil market. None of the companies listed on the stock market give direct access to the oil industry, which is dominated by state-owned Saudi Aramco. Instead, the Saudi stock market consists of a diversified group of companies, many of which are focused on the strong domestic economy.
Nonetheless, investors are able to get exposure to the oil sector through companies whose prices move fairly closely in line with oil prices or who operate in areas that are related to the oil industry, according to a report by the Riyadh-based Jadwa Investment about “Oil and Saudi stock market” released on Saturday.
To examine how investors could get exposure to the oil sector through the Saudi stock market Jadwa took two approaches. First, it looked at the correlation of sectors and individual company share prices with oil prices (WTI) using daily data over the past three years. Second, it examined those listed companies that either supply Aramco directly or whose work is heavily influenced by Aramco projects. None of the group of suppliers and associated contractors were among the companies whose share prices had the highest correlation to the oil price.
The correlation of the TASI (Tadawul All-Share Index) to oil prices over the past three years is 0.681, which is not that strong given the dependence of the economy on oil prices, the report said. There has been a clear divergence between the TASI and oil prices for much of the recent past. For example, at the time that the TASI peaked at almost 21,000 in February 2006, WTI was at only $60 per barrel. By the time that WTI reached its peak of almost $150 per barrel in July 2008, the TASI was down to 9,500. Similarly, while WTI has climbed by over 50 percent sincethe end of August, the TASI is up by less than 10 percent over the same period, the Jadwa report said.
According to Jadwa, only two sectors have a significantly stronger correlation to oil prices than the TASI;petrochemicals and industrial investment. Prices of petrochemical products have a fairly close relationship with those of oil and petrochemical producers benefit from a fixed price for gas, the key feedstock. As a result a change in oil prices should change the profit margin of petrochemical producers. For industrial investment companies, although the correlation is strong, the logical link to oil prices is less direct. Mining company Maaden, the largest in the sector, will start production this year of DAP, a fertilizer, whose prices are influenced by oil prices. For the other companies in the sector, access to fixed-priced feedstock means their export competitiveness changes in comparison to those companies for whom feedstock cost movements are influenced by oil prices.
Two companies, Saudi Printing and Packaging and Saudi Hollandi Bank, have negative correlations to the oil price of greater than 0.75, meaning that their share prices tend to move in the opposite direction to oil prices. There is not a compelling reason why this negative relationship exists for either company, the Jadwa report added.
The report said the price-to-earnings ratios of major oil companies are cheaper than either SABIC (Saudi Basic Industries Corp.), the TASI petrochemicals index or the TASI industrial investment index. This applies to both oil companies listed on the US or European stock markets, such as ExxonMobil, Total and Chevron, or those on emerging markets, such as Petrobras from Brazil and Lukoil from Russia.
It is notable that key Aramco suppliers and contractors are not among those with the strongest correlation. Indeed, all these companies are in the building and construction sector, which is negatively correlated to oil prices.
This relationship may be because their revenues are driven by Aramco spending, which is heavily influenced by expansion plans, rather than oil prices. “While there is a definite long-term relationship between the two, we do not think that short-term fluctuations in oil prices have much impact on Aramco spending,” the Jadwa report said.
