Is Russia on the pump in Ukraine?

Is Russia on the pump in Ukraine?

Oil prices continue to rise as a Russian military build-up continues with an unspoken threat to invade Ukraine. In late February 2014, Putin allowed his “little green men” to invade and annex Crimea. Then came support for the pro-Russian rebels in the Donbas region in eastern Ukraine, starting their rebellion against the Ukrainian Government on April 6, 2014. These military conquests in 2014 meant that Putin took control of 7% of Ukraine’s territory and 14% of its population. But Ukraine as a state entity in its current form (i.e., not allied with Russia like Belarus) remains a provocation for Putin.

In the years up to 2014, oil production had increased significantly, with US fracking companies expanding production and their market share. These companies had the highest extraction costs for Oil but were profitable at a price of around USD 60 per barrel. In 2014, the Islamic IS State also peaked its military success, taking control of some Iraqi oil fields and adding turbulence. The turning point came in November 2014 when Saudi Arabia decided to launch a price war to squeeze the US fracking companies out of the market. Saudi Arabia managed to get most Opec countries and even Russia on board with production restrictions. But by then, the oil price had already fallen to levels where US fracking companies were no longer profitable. What triggered the decline in oil prices in the first place was a prolonged period of overproduction that led to a supply surplus.

There has been no significant investment in the oil sector in recent years. Its role as an environmental villain probably plays a part in this. All major countries and international organizations agree that a transition to sustainable energy sources should be encouraged. Furthermore, there has been a drop in demand for Oil during the Covid pandemic in 2020. It has since then increased due to the economy picking up.

Today’s oil price rise makes Russia’s economy more robust than previously. According to the Finance Ministry, Bloomberg News reports, Russia’s oil and natural gas sales amounted to 9.1 trillion roubles in 2021, exceeding initial forecasts by 51.3 percent. Oil and natural gas revenues now account for 36 percent of Russia’s budget. Russia is the world’s second-largest oil producer after the US, with Saudi Arabia only third.

The 15 largest Oil Producing countries in the world in 2020 (millions of barrels)

However, the US has advanced the most as an oil producer in recent years. So today, changes in US oil inventories are probably the leading indicator for oil prices. It also means that the US could potentially put significant pressure on Russia’s economy by putting pressure on the oil price the same way that Saudi Arabia did in 2014.

In retrospect, the decline in US oil production after 2014 was modest before increasing again.

Weekly US Field Production of Crude Oil (Thousand Barrels per day)

Also, historically, the level of oil prices has been crucial for the condition of the Russian economy. In the 1970s, for example, high oil prices helped the Soviet Union’s economy under Brezhnev to develop well. In the 1980s, the oil price fell back, which contributed to the fall of the Berlin Wall, as the Soviet Union did not have the resources to keep up with the arms race launched by President Reagan in the US.

Does Oil have more to give?

Due to geopolitical uncertainties and production interruptions, Oil has been performing well this year. The graph below shows that Oil has fallen marginally during the last two trading days but managed to bounce of rising EMA9 during Friday’s trading. But momentum seems to be fading. Taking profit may be attractive at these levels, all else equal.

Brent oil price graph: June 22, 2021, to January 21, 2022

The weekly chart should note the negative divergence between the Oil price and MACD. However, one should also note that this negative divergence can continue for some time.

Brent oil, weekly five-year price graph

Russian stock market is underperforming

In terms of nominal GDP, Russia today ranks only 11th globally. The US and China, the world’s largest and second-largest economies, respectively, are 14 and 10 times larger than Russia’s. Moreover, Putin has reason to fear sanctions from the EU and the UK, as these countries account for 46% of Russia’s exports and 38% of its imports.

MOEX Russia Index and S&P 500 performance, last six months

Over the last six months, Russian MOEX has declined 7,1 percent compared to S&P 500, which is still up 1,7 percent. However, the price decline in MOEX began already in late October 2021. The political discount resulting from authoritarian rule is significant in both China’s and Russia’s stock markets today. On the other hand, a resolution of the current tense situation around Ukraine could be a positive trigger for the Moscow Stock Exchange.

The currency market is not in a panic over geopolitical uncertainties

The USD is probably a safe-haven asset during the war, which should be valid also for the CHF. However, USD nor CHF is showing any signs of extreme worries. Below is the EUR/USD currently trading at the floor of a shorter, slightly rising trend channel. Will the floor hold in case of a worsened Russia/Ukraine and the rest of the world situation?

EUR/USD price graph: June 22, 2021, to January 21, 2022

In the weekly chart, one can see how the currency pair is once again approaching Fibonacci 61.8:

EUR/USD, weekly five-year price graph

Investors are sensitive to negative report guidance – Netflix, a good example

With 64 out of 503 S&P500 companies having reported their Q4 results, 77% of them are still better than forecast in terms of earnings, while 80% are reporting higher-than-expected revenues.

But in a declining stock market, this has had little effect. Instead, the market is hyper-sensitive to negative earnings guidance. Netflix shares fell 22% on Thursday, January 20, after the company’s Q4 report, in which the company’s new forecast of 2.5 million streaming subscribers significantly underperformed the market and the company’s previous projections.

Analysts have revised down upcoming quarterly earnings by an average of 4.2 percent over the past 30 days for reporting companies. One week ago, Wall Street analysts expected a 6.2% earnings growth for S&P500 companies for Q1 2022.

The chart below shows that Netflix gapped down on Friday quite substantially. Today’s trading will give more information on whether we saw an exaggerated price decline, and at least some of the gap might be closed.

Netflix price graph: June 22, 2021, to January 21, 2022

In the weekly chart, one can see how Netflix closed below Fibonacci 61.8 as well as MA200. We identify a technical support level at a share price of around 380 USD:

Netflix, weekly five-year price graph

S&P 500 below MA200. No signal of a bottom yet

S&P 500 closed below MA200 in the daily chart below. In terms of RSI, we consider the index oversold. However, one may want to look for a sign that the bottom is reached instead of catching the falling knife. We see no such sign yet. However, there is a support level at 4 385. Let us know if it holds.

S&P 500 price graph: June 22, 2021, to January 21, 2022

In the weekly chart, the next level on the downside is made up of MA50, currently at 4 349:

S&P 500, weekly five-year price graph

Nevertheless, rates in the US have come down during the last two trading days. It confirms the risk-off sentiment at this moment rather than anything else.

US 2- and the 10-year yield, last six months

Nasdaq at support

Nasdaq closed Friday’s close to the support level of 14 450. There is a next level on the downside around 14 150:

Nasdaq 100 price graph: June 22, 2021, to January 21, 2022

In the weekly chart, Nasdaq is trading close to Fibonacci 14 429:

Nasdaq 100, weekly five-year price graph

An intense week with more company reports. Apple on Thursday

This week, Microsoft reports on Tuesday, Tesla on Wednesday, Apple on Thursday, and Caterpillar on Friday. The chart below shows that there is now a bearish double top formation. General market sentiment has played an important role. Can the company surprise the market with the buzz about supply chain issues and increasing input costs?

Apple share price graph: June 22, 2021, to January 21, 2022

In the weekly chart, Apple closed last week below EMA9. The next level on the downside is rising MA20, currently at 158 USD per share:

Apple, weekly five-year share price graph

Both OMXS30 and DAX on MA200 after a strong finish

On Friday, January 21, OMXS30 managed to close just above MA200 after solid trading during the last two hours of the day. However, S&P 500 closed near its lows, and thus, European indices can face some initial selling pressure today.

OMXS30 price graph: June 22, 2021, to January 21, 2022

In the weekly chart, the index closed last week below MA20. Next on the downside is rising MA50, currently at 2 279:

OMXS30, weekly five-year price graph

Source: Refinitiv Eikon and Carlsquare. Note: Past performance is not a reliable indicator of future results.

DAX also managed to close just above MA200 after a solid last two trading hours:

DAX price graph: June 22, 2021, to January 21, 2022

In the weekly chart, the index closed just below MA20. MA50 is currently at 15 402, making up the next level on the downside:

DAX, weekly five-year price graph

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence