Crude Oil Foretells Additional Ruble LossesCommodities / Crude Oil Jan 21, 2016 - 04:23 PM GMT
Warnings from the IEA and new lows in key global benchmarks continues to weigh on the outlook for energy prices, hurting the foremost global oil and gas exporters. Russia has experienced a reversed rags to riches tale over the last two years as the impact of sanctions and the slump in the energy patch have kept the Ruble under extreme pressure. The underperformance continues to echo the losses in oil prices as the supply and demand imbalance remains largely unchanged, only set to grow in coming months with the expansion of Iranian crude oil exports. With market dynamics expected to be weak and existing projections forecasting no rebound in prices, the weakness in the Ruble is only likely to accelerate over time, matching losses in oil prices.
Russia’s Shifting Tides
Fortunes have rapidly shifting in Russia over the past two years as biting sanctions combined with the parallel drop in oil and gas prices have seen gains of the last two decades quickly reversed. In the period leading up to the spat with Ukraine, Russia experienced the strongest growth since the fall of the Soviet Union as it rapidly improved its global standing and increased its spheres of influence. However, the situation in Ukraine and growing hostilities in Syria could not have come at a worse time for the Russian Government which has had to confront crises on multiple fronts.
The painful economic contraction of the last year has left no stone unturned for the country as it contends with high inflation, rising unemployment, and a deep recession. With oil and gas revenues accounting for the single largest portion of Government revenues, the precipitous slide outweighs other geopolitical developments as far as importance on the outlook for the Ruble. With oil prices not expected to cross the threshold of $50 per barrel before 2020 according to the current futures curve, Russia will have to contend with prices remaining lower for longer.
Production Remains High
According to the latest estimates from the International Energy Agency, global oil markets are set to “drown in oversupply” until the end of 2016 at the very earliest. The changing dynamic in the Middle East with the onset of renewed Iranian exports and growing production amid largely stagnating energy demand has set the stage for further declines in prices. Supply is predicted to continue outstripping demand by 1.50 million barrels per day at least through the first half of the year. Already, both the Brent and West Texas Intermediate benchmarks have responded in kind, with oil prices falling to new 12-year lows earlier in the week amid continued momentum lower in prices.
Russia, which recently overtook Saudi Arabia as the world’s biggest crude oil producer, is already anticipating tougher times to come after slashing the Government budget by 10% for the upcoming year. Russia has promised it will be unrelenting in its levels of production even if crude prices continue to fall. Some estimate prices could fall below $10 per barrel before Russia would contemplate production cuts. Thanks to the lack of intervention in the Russian Ruble by the Central Bank, the free-floating currency has mirrored the fall in energy prices, helping to offset some of the losses. With oil prices unlikely to hit major support until the low $20s and high teens, the Ruble will likely shadow the developments, responding in kind with additional weakness as the USDRUB hits new record highs.
Ruble Breakout Just Beginning
After setting up in an ascending triangle pattern for the better part of a year, consolidating between resistance at and a prevailing uptrend, the USDRUB broke out to the upside back in December in a sign the trend higher is set to persist over the coming months. When taking into account IEA forecasts and market expectations, further losses in crude oil prices are likely to see a strong inverse correlation with the USDRUB pair based on Russia’s dependence on the critical energy export economy. The pair hit new multi-year highs today, mirroring the drop in oil prices to new multi-year lows as the acceleration lower in global equity markets has spread to other asset classes.
Although initiating long positions at the present price in the USDRUB is not suggested, especially with the RSI clearly in overbought territory owing to the near vertical and parabolic momentum higher in currency pair, pullbacks should be viewed as an optimal opportunity to establish and add to positions. The Ruble is unlikely to see fortunes improve until oil and gas prices bottom out and begin on the path towards a sustainable rebound. In the meantime, the 50 and 200-day moving averages will continue to act as key support levels for prices. It is very important however not to chase after momentum higher, as the volatility in the pair is only expected to pick up in the coming weeks.
Buy the Dip
Although 2016 is not necessarily destined to be the best year for risk-assets, buy the dip is a worthwhile strategy when it comes to trading the US dollar versus emerging market currencies. The pace of outflows and increased risk-aversion gripping financial markets globally means that any pullback and correction should be exploited to add to existing core positions on the ride up in the USDRUB pair. With the geopolitical and underlying economic conditions unlikely to improve in the coming months, the Ruble is only likely to give further ground versus peers.
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