Crude Prices Cloud Market Rally Hopes

Investors were starting to rediscover their enthusiasm for Russian stocks after last week's string of gains, but a two-day slump in crude prices may lessen the market's chances to continue the rally.

The MICEX and RTS indexes, which reopen Wednesday after being closed Sunday through Tuesday for a public holiday, were set to spring back on the results of the U.S. presidential elections, as well as two days of solid gains on world markets.

After the markets' close Saturday, the government announced that it would again lower the export duty on crude after producers complained that they were losing money on their sales abroad. The news sent spot prices for Urals crude, the country's export blend, down more than 11 percent from their level Saturday to $56.84 per barrel Tuesday evening in Moscow.

Vladimir Vedeneyev, an oil analyst at the Bank of Moscow, said Tuesday that Russian stocks' performance would depend mostly on world exchanges, which have done well this week. The oil price has fluctuated in a range from $56 to $62 in the past month, and traders might take the latest drop calmly, he said.

The ruble-denominated MICEX Index finished last week with an astounding 49 percent rebound, and the dollar-denominated RTS Index managed a similar gain of 46 percent.

"It's nice to finally see something. Maybe we've finally found our bottom," Alfa Bank chief strategist Ronald Smith said Saturday, before adding that the "persistent urge to sell" would likely return to haunt the market at some point.

After pulling off gains of nearly 20 percent on Thursday, both exchanges reported comparatively modest gains Saturday on a day of low-volume weekend trading. The MICEX Index, open for a half day, advanced 4.8 percent to close at 766.9 points. The RTS rose 3.8 percent to 802.4 after a full trading day.

James Beadle, director at Pilgrim Asset Management, said 50 percent of the temporary rebound could be attributed to rising oil prices, while the other half was thanks to the money the state has been injecting into the market.

"[The government] is creating artificial demand at a period when fundamentals appear to be good," Beadle said, referring to speculation that Vneshekonombank is being given an allowance from the Finance Ministry of $190 million per day to prop up the country's equity markets.

And while falling oil prices may come back and "test market waters again," investors shouldn't be surprised to see a "comfortable rally of oil prices over the election period in the U.S.," he said.

The Urals blend rose almost 7 percent last week, pushing the country's energy producers toward the front of the surge. Gazprom rose nearly 60 percent on the MICEX, while the country's two largest oil companies, Rosneft and LUKoil, both saw weekly gains of 45 percent.

"To see the same trajectory would be pretty unusual," James Fenkner, director of Red Star Asset Management, said, adding that the markets would need to see higher commodity prices to rise any higher in the short term.

Staff Writer Anatoly Medetsky contributed to this report.