Ruble Reverses Gains After Russian Oil-Output Freeze Disappoints

  • Market had been looking for a production cut: Union Bancaire
  • Bonds decline after Doha meeting between oil ministers

Russia, Saudi Arabia Freeze Oil Production: What’s Next?

The Russian ruble weakened after an agreement with Saudi Arabia to freeze oil output fell short of expectations that the world’s two largest crude producers would agree to a cut to boost prices.

The currency reversed a rally of as much as 1.4 percent and traded 1.2 percent weaker at 77.872 per dollar as of 5:53 p.m. in Moscow after oil ministers from the two countries agreed to hold output at January’s levels. Government bonds fell as the announcement in Doha cut back gains in oil, Russia’s biggest export earner, leaving it 1.3 percent lower at $32.97 a barrel compared with an intraday gain of $35.55.

Oil’s collapse to a 12-year low last month amid a global glut has put Russia’s economy on course for a second year of contraction and forced the government to consider budget cuts. Tuesday’s decision won’t do much to help commodity prices recover, said Koon Chow, a strategist at Union Bancaire Privee in London. The ruble went from being the best performer in emerging markets to the worst after the decision.

"There were heightened expectations of a production cut rather than a ‘freeze’ of production levels,” Chow said. “This is an important initial step to stabilize the oil market but given the oversupply in the market we need either demand to pick up, or for non OPEC producers such as the U.S. to actually cut production. We are not yet at this point."

Venezuela has lobbied exporters including Russia, Iran and Saudi Arabia to arrange a meeting between OPEC members and other suppliers in an attempt to reach an agreement to balance the market. Maintaining output will be “adequate” and the nation still wants to meet the demand of its customers, Saudi Oil Minister Ali Al-Naimi said on Tuesday after talks with Russian Energy Minster Alexander Novak. 

‘Knee-Jerk’

“The knee-jerk reaction in the ruble implies that the market expected to hear more about a potential supply reduction,” said Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. “The global market will remain flooded by a supply of oil in the coming months."

The agreement depends on other producers following suit, Qatar’s Energy Minister Mohammed bin Saleh al-Sada told reporters in Doha Tuesday. The pact won’t be meaningful unless Iran and Iraq, who have been raising output, co-operate, Commerzbank AG said.

Brent crude, used to price Russia’s main export blend, is down about 11 percent this year, while the ruble has weakened 5.4 percent. The price in rubles fell 0.1 percent on Tuesday to 2,567, while the government budget for 2016 had planned on an average of 3,165 per barrel.

Russia’s Finance Ministry will offer 30 billion rubles of OFZ bonds tomorrow, including 20 billion rubles of OFZs due September 2031, and 10 billion rubles of floaters due January 2020, according to a statement on its website. The yield on five-year government bonds rose 2 basis points to 10.36 percent.

The Micex Index of stocks rose 0.8 percent, with Sberbank PJSC climbing 1.4 percent and Gazprom PJSC advancing 1.8 percent.

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