Oil price props up economy

Oil has hit a six-month high of $62 a barrel, despite weak demand and poor economic fundamentals, driving the Russian exchanges to new highs. Some reversal of this trend is expected but a strong price is likely to be sustained into the medium term providing support to the economy and markets.
"The combination of refinery outages, fresh violence in Nigeria and a relatively supportive weekly report from the EIA cemented a bullish scenario for oil yesterday," Ivan Ivanchenko, VTB's head of strategy, wrote in a research note on Thursday.
Oil remains the most important factor for Russian markets and its rise has helped the RTS become the second-best performing market this year, rising 63 per cent since January 11. Despite industrial production falling 16.9 per cent year-on-year in April and the economy remaining in recession, $60 oil has increased positive sentiment towards Russia.
"It means there are no serious imbalances in the Russian economy," said Roland Nash, chief strategist at Renaissance Capital. "With $60 oil there is no crisis in Russia."
However, the reopening of the Flint Hills refinery in Texas following a fire caused the price of Brent crude to slip on Thursday and this was subsequently reflected in on the MICEX and RTS. The EIA reported that U.S. oil refineries were only working at 81.8 per cent of capacity and lack of demand remains a concern for Russia.
"Despite the very strong resilience of oil in the face of still falling demand, the outlook over the summer months is for price weakness," Chris Weafer, chief strategist at UralSib, wrote in an e-mail. "OPEC compliance is slipping, inventory levels are very high and still rising, and both OPEC and the IEA have again cut 2009 demand forecast."
In the next couple of weeks there is likely to be some correction but with the federal budget drafted for $41 a barrel, the economy and markets remain buoyed by the oil price.
"For now, we expect the market to consolidate below recent highs ahead of the long holiday weekend in the US and Britain, with key support at $56 on both markets," Ivanchenko said.
Stockpiles of oil have fallen in the last two weeks but supply is rising and an extra 1 million barrels per day is expected from Saudi Arabia. Mid-term oil prices should be positive for Russia, finding stability around or above $60, providing that the world economy and demand recovers.
"A very strong oil price is also a danger for Russia," said Nash. "The current oil price is great to push through reforms."
Higher oil prices have also helped strengthen the rouble to its strongest point since January 15, as of mid-afternoon Thursday, as people appeared prepared to hold on to roubles in a more stable economy.