Oil is one of the most important sources of modern energy and countries which are well endowed with the resource are equally doing well in terms of economic growth. It is also important to note that the quantity of oil produced by s country against the demand of the product is vividly reflected on the stock exchange. While the demand of oil has ever been on increase, the rise on the cost of oil per barrel in the world market has destabilized and directly affected other stocks due to the fact that it is required to drive all the other processes of production which require the use of oil as the main source of energy.
Oil is the main natural resource which supports the Saudi economy. Earnings which are derived from oil account for about three quarters of the national budget while nearly 89 percent of the total exports are as a result of the activities of oil mining. Further, the Gross Domestic Product of Saudi Arabia is supported by nearly half of the proceeds accrued in the oil industry (Saudi Stock Exchange par 6). Additionally, its oil reserves accounts for about one quarter of the total global oil production with over 200 billion barrels of oil produced. One of the major setbacks in oil production in Saudi Arabia is the high population growth which has continued to put more strain on this valuable natural resource depleting the supply. The high demand of oil in the international market has often led to increasing price per barrel and this has a direct relationship with the activities at the stock market.
In the last three years, oil prices went up leading to a favourable economic time in Saudi’s budgeting. According to the statistics derived from the stock market, twenty eight billion dollars was pumped into the Saudi Arabia’s budget leading to a positive economic growth. The trading of the oil product at the Saudi stock market reveals a direct relationship between oil production index and the market price. For example, the Tadawul stock market revealed a rise in market capitalization in 2004 in the last six years when there was high demand for oil in the world market (Saudi Stock Exchange par 5). When low quantity of oil is produced, the stock market trading index automatically goes up while market capitalization has a direct influence on how much the commodity is being traded hence, when the supply of oil is high, market capitalization is equally on a higher end.
The amount of oil produced by the United States has remained fairly constant since 2003. Nevertheless, there have been slight fluctuations over time. For instance, both 2006 and 2007 witnessed the lowest production years of oil in U.S with only 7.6 million barrels of oil produced. The greatest change in production was witnessed in 2008 from the previous year when 11 percent increase in production was recorded. Although it is being in the third position in the year 2010 in terms of oil production, the United States has recently recorded the highest production volume of 8.5 million barrels per day. This production does not sufficiently meet the energy needs and to some extent, oil imports have to be effected from time to time.
The U.S stock market has responded fast to this level of production. The oil demand which has been increasing is also pushing the socks higher.
The expected August oil delivery of oil in the U.S market has triggered price changes in the stock market with a rise of 1.68 dollars (Index Mundi par.4). The stock market prices are expected to fluctuate quite often in a similar manner depending on the quantity of oil available.
For instance, the U.S stocks were on the higher side by the beginning of the week which was a clear indication of the expected high demand of oil product (The economic Times, 3). This was indeed true because the commodity price in the stock market was equally affected by these expected changes. Although the American markets had witnessed a rise in the price of oil, these would not keep moving up but up and down fluctuations will be common. It will stabilize itself on either the lower or upper end of 75 dollars per barrel.
The demand for petroleum products is ever on an upward trend due to the growing macro economies. On the other hand, economic growth of a country is highly impeded by high prices of oil. The production and exportation of oil by Saudi Arabia has made the country to be one of the strongest economies and this is observed by the value of the product in the stock market index. Following the high demand and seemingly depleting oil resources, the market price is hardly stable. These constant price fluctuations are as a result of the varying oil price in the global market which is aggravated by oil supplying companies. Besides, there are oil cartels which operate as middlemen thereby destabilising the price. This is the reason why the Organization of Petroleum Exporting Countries (OPEC) was formed.
One of the well established oil distributing company with a global presence is British Petroleum (BP). This company is ranked third largest in the world in the energy sector. Its economic performance has been brilliant commanding an excellent lead and therefore attracting investors in the stock market (The economic Times 7). BP has three listings in the major stock markets namely FTSE 100 index and both the London and New York stock markets.
Index Mundi. United States Oil production. 2010. Web
Saudi Stock Exchange (Tadawul). Market Information. 2010. Web.
The economic Times. Oil jumps over $77 as US stock market opens up. 2010. Web.