One-Factor Market/ Oil has dropped 27% since August 2006

[tigerhonaker]

Sep. 26, 2006

One-Factor Market


// Russia has gotten $30 billion poorer as a result of falling oil prices


Yesterday the index of the Russian stock exchange (RTS) dipped below 1500 points to stop at a level it had passed three months ago. Brokers blame falling oil prices and do not expect the market to turn around for the time being. But, hoping for stability in prices in the near future, they are also not inclined to panic.


The RTS closed yesterday at 1452.54 points, its lowest level since the end of June. In the last four trading days alone, according to calculations from analysts at Troika Dialog, the capitalization of the Russian stock market lost $30 billion, mainly as a result of falling oil prices.

"Oil, oil, and more oil. The economic conditions of the market today are all tired up with that indicator," says Alexander Lobanov, the chief of sales at "Prospect." The price of raw crude is falling in the aftermath of the war in Lebanon and Iran's announcement of its readiness for talks. Yesterday the American oil Light Sweet was selling for $60 a barrel, while North Sea Brent sold for $58 and Urals for $55: on average, the price of oil has dropped 27% since August 2006, returning to the level of seven months ago.

Oil and gas companies, according to data from Troika Dialog, make up 55% of the capitalization of the Russian stock market, while metallurgy companies (prices on metals have also fallen lately) make up 12%. It is mainly the falling attractiveness of the oil sector, however, that is dragged down the price on other commodities. A flurry of panic on the RTS yesterday meant that the volume of trading was twice as high as usual: $65.8 million.

The Russian market is not the only market in a fix. According to data from Emerging Portfolio Fund Research, the month of September saw a growing outflow of capital from developing markets that even the US Federal Reserve's decision to freeze interest rates could not dam. For the first week of September, the outflow was $251 million, for the second – $346 million, and for the third – $401 million. In the opinion of Emerging Portfolio, the exodus is mainly caused by falling crude prices and political instability in Thailand, Hungary, and elsewhere, leading investors to want to put their money in developed countries: an "influx" of around $1 billion was noted for September in developed and oil-importing countries. The Dow Jones grew 1.5% in September, despite the overall sluggishness of the American economy, and the Chinese stock market grew by 7% as capital moved from oil-exporters to oil-importers.

Most analysts caution against panic, though some note that the market is likely to drop even further in the next few weeks. Analysts at Alfa Bank, however, believe that the situation will stabilize within a month partially for seasonal reasons, which will help to prop up the price of oil and gas. In the opinion of experts, the "political premium" on gas prices has disappeared, and the price per barrel has reached a fair level of $55-60. This opinion is shared by the IMF, which sees a drop in oil prices below $50 per barrel as extremely unlikely in the near future.

Alfa Bank notes that September is often the least successful month for the RTS: the average change in the market in the month of September over the last 11 years has been a drop of 6.4%. The bank predicts that the RTS index is likely to hover around 1500-1600, with a possible increase to 1750 points or more towards the end of the year. The ratio of share prices and profits, currently standing at around 11, is not overly high. The opinion is shared by many that as long as oil prices remain stable, everything will come out in the wash.

http://www.kommersant.com/page.asp?idr=528&id=707411