Saudi stocks: TASI diverges from oil swings

(MENAFN- Arab News) Before September 2014 the OPEC's Reference Basket of crudes (ORB) traded at a steady of around $100/barrel and the benchmark TASI to a peak of 11000-points.

At this stage ORB had absorbed a loss of around 10 percent on facts that speculators operating in the two main crude oil futures contracts reduced their net long positions by nearly 50 percent. Contrarily the TASI despite having strong correlation with ORB tended to increase hitting a 6-year high on some good news including regulators' plans to liberalize the Saudi stock market for foreign investment.

Even analysts believed that too high return (+30 percent) of 2014 went beyond the justified limits fundamentally.

But since mid-Sep 2014 the TASI has been facing a challenging time in response to OPEC's various strategic decisions.

The sliding oil prices also put significant downward pressure on all the GCC benchmark indices.

The TASI however showed a perfect correlation comparatively.

The reason is the Kingdom's leading role in OPEC. Its petroleum sector accounts for more than ninety percent of budget revenues.

Interestingly the same percentage is the correlation value between ORB and the benchmark TASI on average basis randomly.

Since Sep 2014 the price of ORB fell to a maximum of 45 percent and the TASI 35 percent. Perhaps the difference of 10 percent is due to that uncorrelated portion.

The key question now is whether the TASI has gotten out of the uncontrollable oil swings if yes then how much

Let try to answer this by interpreting the given chart.

Both variables ORB (in blue) and the TASI (in green) are perfectly related as they move in the same direction.

For better illustration and to avoid the scale issue I exchanged the base value of TASI with ORB price and then applied their independent movement in terms of US dollars and the percentage change.

Slopes of both variables form an identical pattern of downward movement suggesting a strong relation for the previous four months.

The divergence between the two lines confines within an average movement of 5 percent till Oct. 20 (indicated by red oval). But it expanded to an average movement of 15 percent till mid December (indicated by orange oval).

For the past few sessions the divergence has widened to an average of over 20 percent. Increasing divergence between both suggests that the degree of their correlation has started to become weaken.

That's why a little rise in oil prices sparked Tadawul's intra-day return to reach 8.9 percent on Dec. 18 its biggest gain in six years.

The market's recent surges in high turnover indicate a significant reversal.

A few official statements from the regulators also helped investors to understand the situation and to reduce the prevailed pessimism.

Perhaps the TASI has paid off the major cost of ORB's price tumble and is moving toward normal trading. Thus answer of the question is yes the TASI has gotten out of the extreme volatility but not entirely yet.

Tazeem Anwar is a senior financial analyst at Zughaibi & Kabbani Financial Consultants Jeddah. The

opinions expressed here are those of the author.