Arab members of the Organization of Petroleum Exporting Countries (OPEC) are surpassing their targets. The Kingdom of Saudi Arabia as well as Libya, Iran and Iraq have already added millions of barrels of crude oil to the world market in 2015. Saudi Arabia has pumped the most during the last 30 years.

Most Recent OPEC Developments

The 12-nation OPEC went above its target of 30 million barrels per day for 12 consecutive months. Last Maya alone, the cartel produced 31.58 million barrels in a single day. Saudi Arabia produced 670,000 barrels from February until April. The output of 10.3 million barrels in April was the highest since the eighties. Oil Minister Ali al-Naimi of Saudi Arabia maintained that lower prices are triggering more demand. In fact, global requirements increased 1.5 percent last quarter from one year earlier while supply went up 3.1 percent.

Executives from the largest oil firms worldwide have vowed to expand by cost-cutting and concentrate on potential drilling sites. As prices of crude oil declined 40 percent OPEC oil ministers met in Vienna (Austria) earlier this year to decide if it will be reducing output or continue pumping oil into an oversupplied marketplace. Saudi Arabia, as OPEC’s unofficial leader, made sure that the bloc will not lessen output. It prevailed over the less affluent OPEC members composed of Ecuador, Venezuela, Angola, Nigeria, Iraq, Iran, and Libya.

Updates Related to Saudi Arabia

Saudi Arabia is a principally an oil-based economy. Therefore, substantial changes in oil prices will most probably be followed by actual changes in stock markets.  In case oil prices continue to keep low, this will eventually shape economic policy structure, private sector activities and corporate productivity. This is based on an investment report by JADWA, a stock corporation that operates under the administration of the Saudi Arabian Capital Markets Authority.

Entry of certified overseas investors in the TADAWUL or Saudi Stock Exchange as well as recent weaker performance of Gulf Cooperation Council (GCC) stock makes it worth evaluating the nature of TASI or Tadawul All-Share Index’s relationship with crude oil prices all over the world. The report also said descending movement in oil prices worldwide will generally be accompanied by a direct temporary impact on stock markets due to change in sentiments.

Since retail investors make up around 90 percent of daily traded volumes, sentiment plays a bigger role in investment decisions compared to more developed stock markets. This can be highlighted by recent events following the steep decline in oil prices, by around 50 percent since mid-2014. In the case of the TASI, the downward trend was not reflective of market fundamentals, since a reduction in oil prices does not have an immediate impact on the growth of the economy or individual corporations. 

Cause of Oil Price Slump

It may be true that the reason for the price trough was associated more with panic than dampened investor outlook. Numerous retail investors became apprehensive that lower prices of oil will provoke the Saudi government to slow down or curb expenditures thereby putting pressure on corporate earnings in the long-term.

However, investors’ concerns over lower monetary and business-related costs were alleviated when the Saudi Arabian government implemented an extensive fiscal plan at the end of last year. Since then the TASI stock index recovered helped by persuasive Royal succession, salary bonuses for public sector employees, and stabilization of international oil prices.

Another significant effect of oil price rise and fall can be classified according to two well-defined but interconnected communication conduits. These are the public and private sectors. More or less, 86 percent of government income comes from oil. Therefore, an extended period of lower prices will influence government expenditures. At the same time, higher prices that go on for over a year will lead to accumulation of fiscal balances that will increase expenditures. In turn, these will push up Gross Domestic Product (GDP) growth rates and corporate profitability. These will in due course translate into a positive consequence on the stock market.

SAMA Foreign Reserves

Right now, reduction of government’s Gross Fixed Capital Formation (GFCF) will not be as excessive compared to the eighties and nineties. One of the major reasons for this development is the huge amount of foreign reserves which amounts to SR2.6 trillion or $683 billion. This is maintained by the Saudi Arabian Monetary Agency (SAMA) and the figures are very recent (end of April 2015).

This should provide enough resources for the Saudi government to sustain sufficient level of spending during 2015. At the same time, there is enough room for the government to increase debt considering strong credit ratings and exceptionally-low debt levels. Most probably, the government will shift its financing approach from utilizing only foreign reserves to a combination of both foreign reserves and arrears to subsidize fiscal deficits in 2015.