Russian bonds slump tracking weak oil prices, OPEC meeting eyed

The Russian 10-year bonds slumped on Wednesday, following weak cues emerging from crude oil prices, pushing the yield of 10-year bonds higher 7 basis points. The benchmark 10-year bonds yield, which is inversely proportional to the price of bonds, rose to 8.950 percent by 10:40 GMT.

The Brent crude oil, a global benchmark for Russia's main export, was plunged more than 1 percent after UAE Oil Minister Suhail Mohammed Al Mazrouei said the market will fix itself to a fair price for consumers and producers, adding that the rules of supply and demand are working. The remarks pour cold water on the probability that OPEC will agree to an output freeze to buoy prices. The International benchmark Brent futures fell 1.80 percent to $49.00 and West Texas Intermediate (WTI) dipped 1.24 percent to $48.49 by 09:20 GMT.

Investors await the OPEC meetings scheduled later this week. A senior OPEC source tells Reuters that Gulf OPEC countries are looking for coordinated actions to stabilise the oil market. OPEC holds its regular oil meeting on Thursday in Vienna. At tomorrow's OPEC meeting, we do not look ahead for any action to be taken. Not much has changed since Saudi Arabia scuttled the draft freeze agreement (that excluded Iran) in Doha, at the direction of Deputy Crown Prince Mohammed bin Salman. Our view is that it will be difficult for Saudi Arabia and Iran, along with the rest of OPEC, to agree on anything next week. In addition, crude prices have been strong in recent weeks, so there is not much incentive for OPEC members to work hard to agree on any action, such as a freeze that includes Iran. Moreover, there is actually a risk to agreeing on such a measure.

If a freeze that includes Iran were agreed, and if it pushed up prices due to more bullish market sentiment, prices might get “too high, too quickly”. Similar to the failed Doha agreement, we do not think a freeze would have any impact on actual crude production. A surprise freeze cannot be entirely ruled out, but we consider it to be a low probability “tail risk”. Oil markets continue to be driven by disruptions and by expectations of a balanced global market in the second half of this year.

Meanwhile, the ruble depreciated to 66.95 per dollar as Brent fell to $49.19 a barrel and Micex Index of equities fell 0.10 percent to 1897.05 by 10:40 GMT.