Economy, Business And Markets

Oil-Driven Systematic Risk in Capital Market

Analyst at Securities & Exchange Organization
Oil-Driven Systematic Risk in Capital Market
Oil-Driven Systematic Risk in Capital Market

Oil prices witnessed a sharp plunge last year due to the US becoming self-sufficient in shale oil and China’s sluggish economic growth reducing oil demand and consumption. Hence, oil-rich economies have been competing to maintain their share of the market by giving incentives.

Almost every economy was effected, especially Persian Gulf littoral states with Iran being no exception. Bear in mind, oil production forms 20% of Iran's GDP, while chemical and refinery companies cumulatively form 30% of the domestic capital market. While many argue that the market is to be even more corrected downward, there are others who disagree. The question now is: Has the systematic risk associated with oil prices rooted out of Iran’s capital market?

As oil prices were dipping, the 166th meeting of the conference of the Organization of the Petroleum Exporting Countries was held in Vienna, Austria on November 27, 2014, in the hope of cutting down production levels and holding up prices. However, Saudi Arabia's opposition prolonged the decline. Soon after, Arab countries' benchmarks crashed, while domestic benchmarks remained partially immune, thanks to the preventive and supportive infrastructure such as price fluctuation limit and measures taken by key players in the market. On December 16, the UAE, Saudi Arabia and Qatar’s benchmarks bottomed out 34.29, 26.0 and 14.75 percent respectively, while TEDPIX was moderately drooping and was down just 6.9%, as indicated by the figures in the following diagram. All four benchmarks are highly correlated with oil prices as illustrated in the figures:

Following a sharp fall, oil prices went up and down for a couple of months with WTI crude oil reaching a low of $45 a barrel. The prices improved steadily afterwards, stabilizing at about $60 per barrel since many oil rigs were suspended and shale producers retreated, mostly in the US, as a result of the shale oil extraction process not being economical, leading to Arab benchmarks to rebound.

Now after a year, the three aforementioned benchmarks are down by about 12, 4 and 9 percent respectively and continue to heal. However, TEDPIX is down by 17%, and domestic benchmarks are still gradually falling, although Iran is less reliant on oil incomes in terms of its GDP compared to the three countries.

There were promising unanimous comments about the fair value of oil to be about $75 per barrel by OPEC members at the 167th OPEC’s meeting held on June 5, 2015. Now that oil prices are steady, even gradually rising, it’s reasonable to say that the systematic risk is resolved and benchmarks are to amend. However, TEDPIX decline stems from a number of systematic risks among which are lingering western sanctions (imposed against Iran over its nuclear energy program), recession and high inflation, which were deepened by oil prices notching all-time lows.