Oil: The Most Comprehensive Analysis of Its Role in the Saudi Financial Market

Crude oil is a natural hydrocarbon material found in deep reservoirs beneath the earth's surface and is one of the most important sources of energy in the modern world. In the Saudi context, oil has gained strategic importance since its discovery in the 1930s and has become the primary driver of economic and social development. Oil revenues represent between 70% to 80% of government budget revenues, covering the majority of public investments and major projects in the Kingdom. Oil also constitutes about 40-50% of the gross domestic product and provides around 90% of the value of Saudi exports to the world.

Financially, the Saudi government relies primarily on oil revenues for preparing annual budgets, using what is known as the "budget barrel price" (which is often estimated at around $80-85 per barrel in 2024) as a benchmark for achieving financial balance. Oil also supports the stability of the Saudi riyal, as the currency's exchange rate is linked to the US dollar, enhancing confidence in the national economy and encouraging foreign investment.

Oil also indirectly affects other sectors, such as industry, transportation, construction, and government services. Many industries depend on energy derived from oil, and transportation and operational costs are influenced by global oil prices. Furthermore, oil revenues contribute to funding social welfare programs and infrastructure, enhancing the quality of life for citizens. The importance of oil in Saudi Arabia goes beyond being an export commodity; it is an economic stabilizer and a fundamental pillar for achieving the Kingdom's Vision 2030, which aims to diversify income sources and develop non-oil sectors.

The Saudi financial market (Tadawul) is a vital platform that reflects the pulse of the national economy, with oil playing a central role in shaping the trends of the general market index "TASI." Although crude oil itself is not directly traded on Tadawul, the performance of listed oil, energy, and petrochemical companies is closely affected by global oil price movements. Among these companies, Saudi Aramco (symbol: 2222) stands out as the largest listed company by market capitalization, representing approximately 10-11% of the total market capitalization.

When global oil prices rise, this positively reflects on the results of companies in the energy sector, leading to increased revenues and profits, which drives up the shares of these companies and consequently affects the rise of the general index. For example, in 2023 and 2024, Aramco's profit increases were directly linked to rising average oil prices, boosting confidence among local and foreign investors in the market and attracting more capital. Conversely, a decline in oil prices often leads to a decrease in the profits of oil companies, negatively impacting overall market performance.

The impact is not limited to oil companies alone; it extends to manufacturing, petrochemicals, transportation, and even cement companies, where energy costs are a key factor in profitability. Investor sentiment is also influenced by oil price expectations, making the Saudi financial market more sensitive to shifts in global energy markets. Given this close interconnection, understanding the dynamics of the oil market is essential for accurately tracking the performance of the Saudi stock market.

The Kingdom of Saudi Arabia holds a prominent position among the world's largest oil producers, with an average daily production ranging between 9 to 10 million barrels during 2023-2024, with ambitious plans to increase production capacity to over 13 million barrels per day by the middle of the next decade. This measured expansion is part of the Kingdom's strategy to maintain its leadership in OPEC and meet the growing global demand, especially from Asian markets like China and India.

Saudi oil production relies on giant fields such as Ghawar and Safaniya, which represent a significant portion of the country's proven reserves estimated in hundreds of billions of barrels. This massive reserve gives Saudi Arabia the ability to adjust production and influence the balance of global markets, as it plays the role of the swing producer within OPEC, often intervening to increase or decrease production to stabilize prices.

In recent years, the Kingdom has faced significant challenges related to fluctuations in global demand, geopolitical tensions, and the gradual shift towards renewable energy sources. Nevertheless, Saudi Arabia has remained committed to its strategy of investing in enhancing production efficiency, developing smart extraction technologies, and expanding refining capacity both locally and globally. Additionally, the Kingdom has launched major projects in renewable energy and green hydrogen as part of Vision 2030, reflecting its awareness of the importance of economic diversification and achieving sustainable energy security, without abandoning oil's position as a key strategic resource in the coming decades.

Saudi Arabia's proven oil reserves are among the largest in the world, ranking just behind Venezuela and Canada in terms of the size of proven reserves, estimated in hundreds of billions of barrels. These vast reserves give the Kingdom an exceptional ability to maintain high production rates for decades to come and provide it with significant maneuverability in facing global market fluctuations.

Oil reserves play a central role in the long-term planning of Saudi economic policy. They allow the government to set ambitious development programs and finance massive infrastructure projects based on a solid confidence in the continuity of oil revenues. These reserves also grant the Kingdom the ability to manage its international relations from a position of strength, as it can influence supply and demand balances in the global market and leverage that in foreign and economic policy.

From an investment perspective, oil reserves serve as a safety valve for local and foreign investors, reflecting financial stability and the ability to meet long-term obligations. These reserves also contribute to supporting the stability of the national currency (the Saudi riyal) by enhancing foreign exchange reserves. With global trends shifting towards renewable energy, Saudi Arabia continues to invest in oil extraction technologies and increase efficiency to ensure sustainable utilization of its reserves and maintain its pivotal role in the global energy market for decades to come.

Global oil prices have experienced notable fluctuations during 2024 and 2025, with Brent crude prices ranging between $70 and $85 per barrel, with some periods recording levels around $80. Prices are influenced by a variety of factors, including changes in global demand, production policies of the OPEC+ alliance, geopolitical tensions, and economic developments in major markets such as China and India.

For the Saudi economy, oil prices are a critical element in determining the size of government revenues and preparing state budgets. Every increase in oil prices directly translates into increased revenues, allowing the government to finance development and infrastructure projects and support social welfare programs. Conversely, periods of declining prices lead to financial pressures that require reprioritization or resorting to debt markets to cover deficits.

Fluctuations in oil prices also affect investor sentiment in the Saudi financial market, as the profits of major companies—especially Aramco and petrochemical companies—are closely linked to global price levels. Recent examples show that the rise in oil prices in 2023 led to Aramco achieving annual profits of nearly $161 billion, which boosted overall market performance. Conversely, during downturns, some companies experienced significant profit declines, which reflected on the performance of the TASI index. Additionally, oil prices help determine the exchange rate of the Saudi riyal against the dollar, providing the national currency with relative stability and enhancing the attractiveness of the Saudi economy for foreign investments.

Saudi Aramco (symbol: 2222) is the largest integrated oil company in the world by market capitalization and daily production. Founded in the 1940s, Aramco manages the largest proven oil reserves and has a vast network of refineries, processing centers, and export facilities. The company's shares were listed on the Saudi stock market (Tadawul) in late 2019 in a historic event, making it the largest listed company in the market and a driving force in the energy sector.

Financially, Aramco achieved record annual profits exceeding $161 billion in 2023, driven by rising global oil prices. The company's market capitalization represents about 10-11% of the total market capitalization of Saudi Arabia, making Aramco's share movements significantly impactful on the general TASI index. Additionally, Aramco provides generous annual dividends to shareholders, enhancing its attractiveness to both local and international investors.

Aramco plays a pivotal role in supporting the Kingdom's economic transformation strategy, investing in renewable energy development projects, green hydrogen production, and expanding its petrochemical operations globally. The company also serves as a financial safety net for the state, contributing approximately 70-80% of total government revenues. With its high efficiency and flexibility in facing market fluctuations, Aramco maintains a leading position among the largest energy companies globally and remains a fundamental pillar in achieving Saudi Vision 2030 for diversifying the national economy.

The Organization of the Petroleum Exporting Countries (OPEC) and the OPEC+ alliance play a crucial role in regulating global oil production, including major countries such as Russia, the UAE, and Kuwait. These alliances aim to coordinate production policies to achieve a balance between supply and demand, thereby ensuring price stability at acceptable levels for both producers and consumers.

Saudi Arabia leads OPEC+ due to its massive production capacity and proven reserves, often acting as the swing producer that bears the largest burden when production cuts or increases are needed. In recent years, for example, Saudi Arabia agreed to extend production cuts while maintaining production levels between 10 and 11 million barrels per day during 2024, aiming to support prices amid global demand fluctuations and the COVID-19 pandemic's impacts on the international economy.

OPEC+ decisions directly reflect on the Saudi economy and stock market performance, as maintaining appropriate price levels enables the Kingdom to achieve stable revenues. These policies also contribute to enhancing global energy market stability and grant Saudi Arabia political and economic leverage on the international stage. As competition from alternative energy sources rises, the importance of continued coordination within OPEC+ becomes evident, ensuring that oil remains a key driver for both the Saudi and global economies.

The Saudi oil sector is characterized by deep integration across various value chains, starting from exploration and production (Upstream), through refining and processing (Downstream), to export and petrochemicals. Saudi Aramco dominates most segments of this chain, but the sector also includes other prominent companies such as SABIC (Saudi Basic Industries Corporation) and Taif Petrochemicals.

Companies in the exploration and production phase focus on extracting crude oil and natural gas from the giant fields spread across the Kingdom. The crude oil is then transported to refineries, where it is converted into derivatives such as gasoline, diesel, kerosene, and chemical products that serve as essential inputs in petrochemical, plastic, and fertilizer industries.

Alongside Saudi companies, the Kingdom faces strong competition from global producers such as the United States (which is experiencing a shale oil boom), Russia, Iraq, and the UAE. It also faces indirect competition from alternative energy sources like natural gas, solar, and wind energy, especially as countries worldwide aim to reduce carbon emissions. Nevertheless, global demand for Saudi oil remains strong, particularly due to the quality of its crude and relatively low production costs compared to its competitors.

Saudi Arabia seeks to enhance its competitiveness through continuous investments in modern technologies and infrastructure, increasing integration between exploration, refining, manufacturing, and exporting activities, thereby strengthening its position as a major player in global energy markets.

The impact of oil extends beyond the energy sector and related industries to encompass most economic sectors in the Kingdom. For example, energy costs, particularly fuel derived from oil, constitute a significant portion of production costs in the industrial, transportation, construction, and agricultural sectors. When oil prices rise, the costs for these sectors increase, potentially leading to higher prices for final products and affecting inflation.

In the construction sector, cement companies rely on fuel for manufacturing and transportation, making them sensitive to any changes in oil prices or government energy support policies. For instance, companies like Hail Cement (symbol: 3001) have experienced fluctuations in profitability due to changes in fuel and electricity prices, as energy constitutes an essential part of production costs. Additionally, rising oil prices lead to increased transportation costs, affecting the prices of goods and services in the local market.

In the petrochemical sector, oil and gas serve as primary raw materials for producing plastics, fertilizers, and pharmaceuticals, making the profitability of these industries linked to oil prices. Furthermore, oil supports social welfare programs and government projects that rely on public budget financing. In this way, it can be said that oil is the lifeblood of the Saudi economy, with its effects intertwining with various economic and social activities both directly and indirectly.

Hail Cement Company (symbol in Tadawul: 3001) serves as a practical example of companies that are indirectly affected by oil fluctuations, despite operating in a sector different from energy. Established in 2010 and commencing commercial production in 2013 with a production capacity of approximately 1.7 million tons annually, the company focuses primarily on ordinary Portland cement, with a portion of production allocated to sulfate-resistant cement.

The cement industry heavily relies on energy derived from oil and gas, whether for operating kilns or transporting products to local and international markets. Any change in oil prices or government energy support policies directly reflects on production costs and the company's profitability. For example, Hail Cement experienced an increase in the price-to-earnings (P/E) ratio to levels between 30 and 50 times in the post-COVID period, influenced by declining profits and rising costs, despite resuming cash dividends after market recovery.

The company's market capitalization is approximately 700 million Saudi riyals in mid-2024, with its share price ranging between 11 and 12 riyals. Although classified among small companies in the cement sector, its financial performance is closely linked to changes in energy prices, transportation costs, and government export policies. Additionally, expansion and acquisition plans, such as its recent attempt to acquire part of Qassim Cement, aim to enhance its competitiveness in facing market challenges.

Saudi Arabia is undergoing a major economic transformation under Vision 2030, which aims to diversify income sources and reduce reliance on oil as a primary source of government revenues. However, oil still retains a pivotal strategic role in the national economy, given its vast reserves and high production that place the Kingdom among the largest producers and exporters globally.

Among the most significant challenges facing the Saudi oil sector are global shifts towards renewable energy and reducing carbon emissions, necessitating the Kingdom to develop clean energy production technologies and invest in projects like green hydrogen and solar energy. The Kingdom also faces increasing competition from shale oil producers in the United States and liquefied natural gas sources, requiring enhanced efficiency and cost reductions to ensure competitive sustainability.

On the other hand, these challenges present significant opportunities for Saudi Arabia, such as utilizing oil revenues to finance massive infrastructure projects, sovereign wealth funds, and developing new industries like artificial intelligence, tourism, and entertainment. Additionally, the Kingdom's position at the heart of emerging Asian markets provides it with a competitive advantage in meeting the growing demand for both traditional and renewable energy. Thus, oil remains a fundamental pillar in the national economy while the Kingdom continuously seeks to balance leveraging its revenues with preparing for a more diversified and sustainable economic future.

As part of Vision 2030, Saudi Arabia has launched ambitious programs to develop the renewable energy sector, aiming to reduce domestic reliance on oil for electricity production and preserve it for export. These programs include massive solar and wind energy projects, alongside significant investments in green hydrogen production, as seen in the NEOM renewable energy project.

The Kingdom aims to generate over 50% of its electricity needs from renewable sources by 2030, while continuing to invest in technologies to improve oil production and consumption efficiency. This direction does not mean abandoning oil as a primary resource but achieving integration between traditional and new energy sources, enhancing national energy security and allowing for sustainable utilization of vast oil reserves.

Economically, developing renewable energy creates new job opportunities, facilitates knowledge and technology transfer, and attracts foreign investments in innovative sectors. It also contributes to reducing carbon emissions and fulfilling the Kingdom's environmental commitments internationally. At the same time, Saudi Arabia continues to strengthen its role in global oil markets by efficiently developing its oil resources, making it a model for achieving a smart balance between leveraging natural wealth and transitioning to a sustainable and diversified economy.

Oil prices and the performance of the Saudi financial market are significantly affected by regional and global geopolitical fluctuations. Tensions in the Middle East, crises in Ukraine, and changes in international sanctions policies all create uncertainty in global energy markets. For instance, markets in 2023 and 2024 witnessed spikes in oil prices due to supply disruptions, especially during periods of political tensions or technical failures in major supply lines.

For Saudi Arabia, its position as the largest producer in OPEC plays a role in compensating for supply shortages when needed or reducing production to stabilize the market. Additionally, political decisions related to oil export agreements, such as agreements with India and China, or changes in Iranian oil export policies, directly affect demand levels and prices.

These fluctuations are not limited to oil markets but extend to the Saudi financial market (Tadawul), influencing the sentiment of local and international investors. Often, movements in the general index (TASI) reflect market expectations regarding geopolitical developments. Therefore, understanding the relationship between political events and oil markets is essential for any comprehensive assessment of the economic situation in Saudi Arabia and how to manage associated risks.

The Saudi oil and petrochemical sector has witnessed significant developments during 2024 and 2025, driven by rising oil prices and the return of global demand to pre-pandemic levels. Saudi Aramco has increased its investments in refining and petrochemical projects, in addition to expanding its production of green hydrogen and clean energy in line with Vision 2030 goals.

In its quarterly results, Aramco announced an increase in net profits, in line with improved oil prices, positively reflecting on dividend distributions to shareholders and increasing the attractiveness of its shares in the Tadawul market. The company has also entered into several international partnerships to develop advanced petrochemical projects in Asia and Europe, expanding its revenue base and reducing reliance on crude oil exports alone.

In the cement sector, companies like Hail Cement have been affected by changes in fuel and electricity prices, prompting them to seek new expansion strategies such as acquiring regional companies or developing alternative production lines. The sector has also seen government adjustments aimed at reviewing energy support and stimulating investment in more efficient alternatives. Ultimately, these developments highlight the dynamism of the Saudi oil and petrochemical sector and its ability to adapt to local and global changes to achieve sustainable growth.