Oil Barrel Price: Effects on Saudi Financial Market and Cement Sector

The oil barrel price refers to the market value of one barrel of crude oil in global markets. This price is linked to benchmark standards such as Brent crude and West Texas Intermediate (WTI), in addition to Saudi oil, often known for its light grades from the Middle East. In Saudi Arabia, oil is the primary source of government revenues and constitutes a significant portion of the GDP. Fluctuations in the oil barrel price lead to direct changes in government liquidity, spending on projects, and support for various economic sectors. Most economic growth and investment in the Kingdom depend on the strength of the oil sector, making monitoring the barrel price crucial for tracking market trends and the state's fiscal policy directions.

The price of a barrel of oil is determined through supply and demand mechanisms in global markets. Markets use benchmarks such as Brent crude (Brent) and West Texas Intermediate (WTI) as key indicators, while Saudi Arabia sells its oil at an Official Selling Price (OSP) announced monthly. Prices are influenced by factors such as global production levels, OPEC+ policies, geopolitical tensions, and changes in economic growth in major countries. Unexpected events, such as natural disasters or pandemics, also play a role in increasing price volatility. In 2024, markets experienced fluctuations between $70 and $90 per barrel due to changes in production policies and emerging global economic challenges.

During 2024, the average price of Brent crude ranged between $80 and $85 per barrel, occasionally reaching $90 during peak demand and dropping to $70 with increased supply. By 2025, prices stabilized around $80–82 due to moderate recovery in the global economy. The Saudi oil selling price for buyers (OSP) ranged between $60 and $75 per barrel, depending on targeted markets. These levels led to an increase in the Kingdom's oil revenues compared to previous years and heightened investor interest in the energy sector. This volatility reflects market responses to factors such as OPEC+ decisions, developments in U.S. production, and regional political tensions.

The energy sector and the value of oil companies, especially Aramco, hold significant weight in the TASI index. Any change in the oil barrel price reflects on the overall index performance, as rising prices lead to improved corporate profitability and increased government spending, supporting other sectors. Conversely, price declines result in reduced corporate profits and pressure on the market as a whole. For instance, the index closed at 11,308.11 points in late September 2024, declining due to oil price fluctuations. TASI is also affected by the performance of stocks linked to construction and industry, which are tied to the state's ability to finance major projects.

Oil prices critically influence the level of Saudi government spending. As the barrel price rises, the government's ability to fund infrastructure projects, housing, and developmental initiatives increases. Government spending is one of the main drivers of domestic demand for sectors such as construction and cement. Therefore, rising oil prices typically lead to a revival in construction and building materials companies, as seen in 2024 when high oil revenues supported major projects like NEOM and the Red Sea. Conversely, the government may implement austerity measures or budget adjustments in the event of falling oil prices, negatively impacting sectors linked to public spending.

The Saudi cement sector is a key part of the supply chain for major construction projects. Demand for cement is indirectly affected by government spending funded by oil revenues. In 2024, the combined profits of cement companies rose to nearly 2 billion riyals in nine months, supported by increased domestic demand resulting from major government projects. On the other hand, oil prices affect cement production costs, as fuel and energy constitute a significant portion of operating expenses. Rising oil prices may increase costs, but this is usually offset by increased demand or passing part of the cost to the end consumer.

Hail Cement is one of the major companies in the Saudi cement sector. By late 2024, the company's stock price hovered around 12 riyals, with a market capitalization estimated at approximately 3.6 billion riyals. The company features a price-to-earnings ratio ranging from 9 to 10 times, and a dividend yield of 5% or more. Hail Cement benefited from rising oil prices through increased government spending on construction projects, leading to sales growth and improved profits. The company has also focused on enhancing production efficiency to cope with rising energy and transportation costs resulting from oil price fluctuations.

The Saudi cement sector includes several major companies such as Yamama Cement, Qassim, Southern Region, Medina, Eastern Region, Al-Jouf, Mecca, and Northern Region. These companies compete for market shares by developing production lines and offering competitive prices. Hail Cement holds a strong position in northern Saudi Arabia and seeks to expand its share by improving productivity. In 2024, the sector witnessed changing dynamics in market shares, with major companies stabilizing their shares and noticeable competition among medium-sized companies. The high demand resulting from major state projects improved profit margins and increased dividend payouts.

The OPEC+ alliance played a pivotal role in maintaining oil price balance during 2024-2025 through production cut or stabilization policies. The decisions of the alliance, led by Saudi Arabia and Russia, helped mitigate price declines in the face of increased production from some non-OPEC countries like the United States. At times, production cuts led to prices rising above $85, while increases in global inventories or geopolitical tensions contributed to price volatility. Monitoring OPEC+ decisions remains essential for understanding price trends and the expected impact on the Kingdom's economy and its sectors.

The Kingdom is witnessing massive investments in infrastructure projects such as NEOM, the Red Sea, the Haramain Train, and smart city developments. The pace of these projects heavily relies on state revenues from oil. The rise in oil barrel prices in 2024 allowed the government to enhance spending on these projects, positively impacting demand for cement and building materials. Companies like Hail Cement benefited from this growth, as their sales and profits increased due to rising demand. Conversely, periods of price declines may lead to delays in some projects or reductions in allocated budgets.

Oil prices experienced volatility during 2024-2025 due to a range of factors: (1) OPEC+ decisions regarding production cuts or stabilization; (2) changes in global economic growth, particularly in China and Europe; (3) geopolitical crises such as wars or sanctions; (4) increased shale oil production in the United States; (5) shifts towards renewable energy and environmental regulations; (6) the impact of global inflation and commodity prices. These factors led to price movements between $70 and $90 per barrel, with sharp fluctuations at certain periods.

Global inflation in 2024 led to increased costs of raw materials and energy, affecting the profit margins of cement companies. Nevertheless, Saudi cement companies benefited from stable monetary policies and strong domestic demand, allowing them to pass some costs onto final prices. Some companies, such as Hail Cement, focused on improving operational efficiency and investing in alternative energy technologies to cope with inflationary pressures. The sector's results for the third quarter of 2024 demonstrated the companies' ability to maintain profit growth despite external challenges.

Historically, Saudi cement companies distribute a significant portion of their profits to shareholders. In 2024, major companies announced high cash dividends, supported by profit growth and increased domestic demand. For Hail Cement, the board recommended cash dividends of 40-50% of net profit, enhancing the stock's appeal to investors seeking regular income. These policies reflect confidence in the sustainability of cement demand and the financial stability of companies, despite challenges related to fluctuations in energy and raw material prices.

Companies and the Saudi economy, in general, face risks arising from oil price volatility, such as reduced government revenues and profitability pressures on industrial companies. Many companies adopt strategies to manage these risks, such as diversifying income sources, improving operational efficiency, and investing in renewable energy. Government policies also play a role in regulating spending and continuing to support vital sectors during periods of price declines. It is essential for investors to understand these risks and avoid making investment decisions without consulting a specialized financial advisor.