We continue keeping you informed on the results of our activity and IFC specialists’ take on the situations and processes in global and regional economies.

In September 2017, the assets  value of the WellMax investment portfolio increased by 1.03% in USD and EUR, which is equivalent to 13.08% per annum, with monthly compounded interest. The annual yield amounted to 13.82% in rubles and 11.88% in yuans, with monthly compounded interest.

The assets value of the WellMax Premium investment portfolio increased by 9.44% in USD over the period from September 10, 2017 to October 10, 2017.

Quotations of the gas assets presented in our portfolio (UGAZ, SWN, GPOR and others) have showed a sustainable growth in the last month, as we had forecasted it, which has resulted in a significant increase in the assets value of the WellMax Premium investment portfolio. 

In the first place, a significant increase in the assets value of the WellMax Premium investment portfolio in the last month was caused by positive changes in the prices of the gas companies' shares presented in our portfolio. Southwestern Energy Company & Gulfport Energy Corporation securities mentioned in our previous economic reviews have seen a noticeable growth among others. Thus, shares of Southwestern Energy Company grew by 18.53% for a month dated from the last report date, whereas shares of Gulfport Energy Corporation rose by 21.1%, as it can be seen from the charts below (source: Yahoo Finance).  

At the same time, quotations of the UGAZ ETF, also presented in the WellMax Premium portfolio, along with the price of natural gas futures for November in the US, whose dynamics it tracks, were highly volatile in the last month. US natural gas saw a significant growth in August and early September, however, in the second part of the month, gas quotations steeply shifted to the red zone, which can be seen from the graph below (source: CME Group). 

At the same time, it cannot be neglected that in early September, we closed roughly 50% of positions in the UGAZ ETF at high values, fixing the profit and avoiding losses. Besides, we used the fall of quotations to open new long positions due to speculative nature of sale in late September/early October.

As we mentioned in previous economic reviews, consumption of natural gas along with its price are highly influenced by a seasonal factor: gas consumption reaches its peak in the winter heating season and in the summer season of higher energy consumption (space conditioning). In its turn, gas consumption is usually low in late September/early October, as there is no need in space conditioning and temperature is not very cold yet. Thus, speculating investors used the factor to open several short positions, which resulted in a price fall.

At the same time, like characters of the TV series “Game of thrones”, we understood that “winter was coming”, whereas low volume of natural gas in storage had already resulted in stocks whose current level had fallen below an average rate over the last 5 years, as we had forecasted it before.

Considering the data on storage along with the price decline, we expected the price of natural gas in the US to resume its growth and increased the funds invested in UGAZ. It also should be mentioned that gas quotations on the American stock exchange have already jumped from the troughs reached and the price of natural gas in the US (along with the price of the UGAZ shares) have resumed its growth that can be seen from the graph below (source: Yahoo Finance).

Thus, we stick to our forecast that quotations of the UGAZ ETF and stocks of Southwestern Energy Company and Gulfport Energy Corporation will have grown gradually by the late 2017/early 2018.

In the last month, oil market has been highly volatile as well. In the late September, informational space was dominated by news, which influenced oil price in a positive way. Due to this, oil quotations surpassed the mark of $59 per Brent barrel. However, oil failed to stick to this level and quotations returned into the price band of $48-58 per Brent barrel, which we mentioned in the previous review.   

In order to support the oil price rally started in the early September against hurricane-related oil output failures, OPEC conducted a large-scale verbal intervention in the late September:

- On September 19, Jabbar al-Luaibi, Iraq’s oil Minister stated that Iraq along with several other OPEC member countries supported the idea of decreasing output by another 1% under the corresponding agreement;

- On September 20, during a meeting in Vienna, representatives of the OPEC+ technical committee announced that in August 2017, countries members to the agreement had fulfilled their obligations and cut output by 116%;

- On September 22, in an interview for Bloomberg, Nigeria's oil Minister Emmanuel Kachikwu stated that his country could join the oil output cut agreement by late March 2018;

- On September 25, Turkey's President Recep Erdoğan made a statement about possible freeze of oil purchase from Iraqi Kurdistan where an independence referendum took place on that day. His statement provided oil prices with additional support.

The range of loud statements made primarily by OPEC representatives resulted in a steep price growth and $59 per Brent barrel as mentioned above. At the same time, the market neutralized the growth rapidly and returned quotations into the price band that we outlined in the previous economic review, as the statements were of declarative nature with no real actions behind them.  

- Thus, for instance, the intention to increase output cut under the corresponding agreement expressed by several countries-participants of the oil treaty cannot result in any change in the supply and demand balance in world market, in our opinion, as the proposed cut increase by 1% (18 thousand bpd) amounts to less than 0.02% of world production and its withdrawal from market can be considered as statistical error.  

- The data provided by the OPEC+ technical committee raise doubts as well. The committee announced 116% of conformity with the agreement (99% by OPEC countries and 118% outside the cartel) achieved in August 2017. However, this differs from the information provided by independent sources. Thus, according to Reuters, in August, OPEC countries achieved around 89% of conformity level (against 99% announced by OPEC countries), whereas in September, conformity level slid to 86% due to an output growth by 50 thousand bpd by the cartel countries.

- The statements of Nigeria’s oil Minister Emmanuel Kachikwu raise even more doubts. On September 22, he declared Nigeria’s possible accession to the output cut agreement by late March 2018. However, 10 days before, on September 12, in his interview for the Financial Times, the Minister made the opposite announcement. He said that the country could not join the OPEC+ cut output agreement by the late March 2018. At the same time, it should be mentioned that as early as in July 2017, Kachikwu announced that Nigeria would sustain the limitation of its oil output, if it stabilized at the level of 1.8 million bpd, whereas Nigeria achieved this level already in August (according to Reuters, Nigeria surpassed the threshold of 1.8 million bpd as early as in July). Nevertheless, according to the Minister, this rate remains highly volatile and no decision on output cut has been taken.

The declarative nature of statements prevented the oil price from sticking above $59 per Brent barrel and resulted in a significant decrease in oil quotations, which reached $55 per Brent barrel. U.S. DOE data on the changes in the country's commercial stocks of crude oil restricted the following drop in oil prices. Thus, according to released reports, U.S. crude oil stocks have decreased by 10.62 million barrels for the last three weeks despite expectations of a slight growth by 675 thousand barrels.    

This quite significant withdrawal of oil from storage not only arrested the fall of quotations but also resumed their gradual growth and helped them stick above $56 per Brent barrel. At the same time, it is necessary to mention that the main reason of a rapid decrease in stocks was U.S. export of crude oil steeply enhanced in September/October and its weak import within the same time period, that can be seen from the graph below. 

Thus, this drop in commercial stocks does not show any oil shortage in U.S. market or change in the supply and demand balance of the world's market but only changes in the disposition of stocks.  

At the same time, strong data on oil import to China provides support for oil quotations. According to China's customs, in September, China increased oil import by 9% almost up to 37.01 million tons, whereas from January to September, import grew by 12.2% up to 318.1 million tons. At the same time, in September, China reached new peaks of daily average oil net import at 8.96 million bpd.

Besides, growing contradictions between Iran and the USA may also influence significantly oil prices. If the USA ascertain Iran's breach of the 2015 nuclear deal, Iran's export (according to Bloomberg, in September, it amounted to 2.28 bpd) may be subject to restrictions, which would also lead to a steep price growth. As at the present moment, there is no publicly available evidence proving Iran's breach of the deal, the imposition of new sanctions appears to be unlikely. However, this possibility cannot be excluded at all. 

Considering a big number of changeable factors existing in the oil market, oil prices are likely to remain volatile. Due to this, it is quite difficult to forecast a price band. If the status quo remains unchanged, oil prices are likely to stabilize at the current level or slightly below. However, in case of following escalation of contradictions between the USA and Iran, a rise in oil prices up to $60 and above cannot be excluded.

High oil prices stabilized the ruble but failed to trigger its growth.

As it follows from the chart below (source: Yahoo Finance), currency rate of the Russian national currency gave no reaction to a significant growth of oil prices: over the period from September 1 to October 13, quotations of the Brent oil futures for December grew by more than 9.1%, whereas the ruble managed to strengthen by 0.28% only.

Thus, growing oil quotations were rather a factor preventing the Russian ruble from a further fall. However, the ruble’s disconnect from oil prices, which have been recently discussed by large Russian media sources, at this time appears to be rather a negative factor, as there is no other drivers of growth for the national economy.

It also should be said that a still quite strong interest of foreign investors in ruble assets (market of federal loan bonds, in the first place) under the carry trade investment strategy also did not result in any growth of the Russian ruble. At the same time, as we mentioned it in our previous reviews, an interest in this strategy is going to decline, as the difference between key rates of Russia’s Central Bank and the US Federal Reserve System is decreasing. Besides, according to Russia’s Central Bank, a share of non-residents in the market of federal loan bonds has reached a high of 31.6% or 2.032 trillion rubles in nominal terms. Such a large proportion of foreign possession of federal loan bonds creates additional risks for the ruble, as in case of their massive withdrawal from federal loan bonds a crash of the national currency may happen.  

Thus, considering a combination of factors influencing the ruble exchange rate, we stick to our forecast of a gradual decline of Russia’s national currency by the late 2017/early 2018 by 10% or more of the level at 56.5 rubles/USD.  

The US Federal Reserve System has launched a program for reduction of assets accumulated on the balance sheet, however, any following significant effect on currency and stock markets may be expected not earlier than at the beginning of next year.

In its last meeting, the Federal Reserve decided to start reducing its balance sheet. This decision is most likely to exert additional pressure on the ruble and currencies of other developing countries in the long-term. As we forecasted at the beginning of the current year (Economic review: March 2017), there would be a gradual reduction of the balance sheet in order to avoid turmoil in financial markets. The Federal Reserve is going to decrease reinvestments by $6 billion per month in Treasuries and by $4 billion in Mortgage-Backed Securities. At the same time, the program provides for a quarterly raise in these sums until they reach $30 billion and $20 billion respectively. On October 13, the Fed started to decrease reinvestments in matured Mortgage-Backed Securities; on October 31, the Federal Reserve System will start to reduce reinvestments in Treasuries.      

Considering a huge volume of assets (around $4.5 trillion) accumulated on the Fed's balance sheet because of three stages of the quantitative easing policy, the balance sheet reduction by $10 billion scheduled for 4th quarter 2017 is most likely not to influence the market significantly. However, as reinvestments decrease and dollar liquidity is withdrawn from the market, more and more pressure will be exerted on currencies, in the first place, on those of developing countries.       

Besides, the Fed's program of the balance sheet reduction may result in the US dollar's strengthening against the euro. However, we will refrain from any detailed forecast regarding this pair of currencies, as there is some uncertainty related to the next meeting of the European Central Bank scheduled for October 26. It is possible that at the meeting, Mario Draghi will announce the regulator's readiness to reduce its program of monthly bond buying from the market, which may result in the euro’s growth.

The mid-autumn is expected to be very rich in terms of information: growing geopolitical tension (in particular, between the USA and Iran), the forthcoming meeting of the ECB, uncertainty related to the future OPEC+ oil output cut agreement, etc. Besides, the 3rd quarter corporate reporting starts in the late October, which will also affect the world stock market.

There is a prospect of a quite turbulent and highly volatile period. A period, which demands market participants to take rapid investment decisions based on a deep and accurate analysis, i.e. those competences, which have always been strong sides of the International Financial Community team.

Respectfully yours,

IFC team