By IFCMarkets
Good day, dear investors. Since September 2012 Russian ruble dropped 22% reaching the level of 39 rubles for one US dollar. It is noteworthy that in the same period Brent oil fell from $128 to $98 per barrel i.e. a 23% drop. These are almost identical, comparable figures. Is it a coincidence? Let us look deeper and find safe investment schemes for main “Russian” assets.
In May the US oil export grew to the maximum level since 1999: 288,000 barrels per day. Also the sanctions on Iranian oil exports, which considerably limited the supply, were removed. Currently Brent has fallen below $98, reversing the 6 year rising trend. We also know that according to the Ministry of Finance of the Russian Federation a 1.2% GDP growth is planned for 2015 and all the budgetary obligations for social programs will be fulfilled as planned. It is possible to accomplish these goals on condition of the price for Urals not falling below $100 in 2015-2017. It follows that under the condition of growing oil supply the only means for keeping the budget income at an acceptable level is letting ruble weaken. To visualize this pattern of relationship we have built a pair spread instrument on NetTradeX trading platform : [BRENT+NATGAS]/RUB. The personal composite instrument is built by quoting oil and gas futures against the Russian ruble. It should be noted that the price of each component asset of the pair spread instrument is automatically calculated in US dollars by the software. Buying the synthetic spread instrument is equivalent to buying the base portfolio [BRENT+NATGAS] and simultaneously selling the ruble as in the currency cross-rate model.
The natural gas futures do not affect the trend significantly since it is tied rigidly to the BRENT price. Nevertheless we added this asset with a corresponding weight of 14%, which is the proportion of the income from natural gas export in overall revenue from oil and gas exports of the Russian Federation. A following pattern has been observed since 2008: a fall in oil price is overcompensated by weakening ruble and vice versa. In the last month the correlation between the USD/RUB and BRENT was -80%. As a result the [BRENT+NATGAS]/RUB spread instrument trades in rising trend the last 6 years, see the weekly chart above. The present situation is not different qualitatively from the historical past and there are bases to believe that the monetary policy will not change in short term. This means that the trend will continue and we can consider a profitable investment position that will help to save assets from inflation.
The spread instrument daily chart was built via the NetTradeX software. In order to accelerate calculations only the opening and closing prices for daily candlesticks were used. We can see that the price has approached the rising trend line and a reversal to the green zone is possible. It is most likely that this will happen simultaneously with the breach of the resistance level at 1.01904, built on the basis of Bill Williams’ fractal indicator. Crossing that level will inevitably result in the break- down of the daily resistance line, and will start a new bull trend. It is reasonable to limit the risks by the support level at 0.96414, which is strengthened by the fractal.
After opening the position the stop gets moved to the zone of next fractal minimum following the Parabolic SAR indicator – the strategy of following the trend is used. Thus we change the possible profit/loss ratio in the direction of no loss state. In the end it should be noted that the further fall of ruble can be stopped at the level $90 per barrel of BRENT. This technical support level has a fundamental significance. Further fall in BRENT will create colossal problems for shale oil, since shale oil production cost is higher than the vertical drilling oil production costs. There are all the bases to expect that the US will not allow this to happen by limiting the supply artificially. You can read about making portfolio operations in more details at the section of our website “PCI Building and Trading Guide”.
Free Reports:
Market Analysis provided by IFCMarkets