Angry Russia Investors Won’t Like Recent Oil Forecasts

ETFS

Russia investors aren’t going to get any near-term relief from oil prices. Following a short spike in oil in recent weeks, crude is expected to get cheaper in the days ahead,

Barclays
Capital said in a report released on Monday.

Falling oil prices is bad for Russia day traders, who have been buying and selling based on a combination of geopolitics and the direction of crude oil futures. Looked at over a short period, the Market Vectors Russia (RSX) exchange traded fund by Van Eck Global has decoupled from oil year-to-date. RSX is up. Oil is down. But the upside there has been entirely due to the fighting in Ukraine. Talks of peace deals and renewed fighting with pro-Russia rebels in eastern Ukraine keep RSX volatile way more than oil.

However, over a longer period of time, the popular Market Vectors ETF tracks oil quite closely. Over a five year period, the Russia ETF is down 44% while the S&P GSCI Crude Oil Index is down 52%. By comparison, the

MSCI
Emerging Markets Index rose over 2.4% in the same five year stretch. No other oil producer with a tradable index correlates as close with oil as does Russia. The Kuwait (-19.7%), Qatar (-0.66%) and United Arab Emirates (+138.7%) indices all outperform oil. Even Indonesia (+34.6%) and Norway (-8.35%) don’t come close to tracking oil.

Where’s Oil Heading Now?

The recent recovery in oil prices is similar to that of 2008-09 recovery.  When comparing these two periods there are several similarities worth noting, BarCap’s commodities research team said. In early 2009, when the oil market stabilized and began to recover, it did so in the face of a weak near-term fundamentals globally. Supply was expected to continue outweighing demand, as it is now. As oil rose, so did Russian equities. The Market Vectors ETF rose 51.2% in the first half.

Fast forward to today: the market is experiencing a similar pattern of price action and the outlook is imbalanced, to a much larger extent than during the crisis, says the BarCap team led by Warren Russell in New York.  They think the recent rise in oil prices is a “false flag”.

If actual stock builds are anywhere near market expectations, they will likely weigh on the prices.  US. oil futures fell below $50 a barrel again today. Brent crude is holding onto $60 and Urals oil, which Russia tracks closely, is still in decline and in the upper $50s.  With OPEC cutting back on production, it is likely that U.S. and Canada’s shale oil producers will play a larger role in balancing the market.  Recent weakness in crude oil has come on the back of a stronger dollar. In 2009, when crude rallied, the dollar declined. “If we are to believe that the dollar will show continued strength in the future in its own right, this may mitigate a price recovery,” Russell and company wrote.

If West Texas Intermediate crude prices fall below $48.20 per barrel, that would be a technical signal pressuring oil to a new support price of around $44, according to the Barclays team.

Investors holding Russian equity, therefore,will have to hope for a lasting peace in Ukraine and talks of sanctions being lifted on Russia because of its involvement in the Ukraine war. Unless that happens, the Russia ETF looks like it is in for a tough month.

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