The price of WTI September crude is $82.06 p/bbl and Brent is at $82.32 p/bbl. The weaker WTI price usually means that we are heading for slight weakness and today’s US Energy Dept inventory report may provide that excuse. But, as was seen with last week’s unexpected big stocks jump, this report now has only a very short-lived impact on the oil price. The dollar and the equity market are much more important drivers currently. Having banked strong gains in global markets recently, equity investors are reluctant to push much further ahead for now. Or, at least until there is proof that a higher market rating is justified with evidence of economic growth. The next big test of that will be Friday’s US payroll report and, until then, we should expect to see relatively small range volatility in all markets. The ruble predictably strengthened yesterday, as it has recently tended to react to catalysts with a 24-hour lag. The strength in the oil price and gains in Asian currencies on Monday, and extended further yesterday, helped push the ruble 34.5 basis points better against the dollar to a closing MICEX level of 29.832. Against the generally strengthening euro, the ruble added 2 basis points to close at 39.438. The ruble should hold those levels this morning given that oil and the dollar-euro rate are now close to yesterday’s levels. Norilsk Nickel is the big corporate story in Russia. See our Russian Informer for our analyst's take on the events - more from me on this later. In Russia today, the new and outgoing CEOs of BP are scheduled to meet with Deputy PM Sechin today to discuss the future of BP’s operations in the country (see note below). Russia almost certainly has an energy agenda that it may push with the weakened BP. The two state controlled oil majors, Rosneft and Gazprom Neft are well placed to benefit from any deals agreed in the future. The weekly inflation report will be published and, either today or tomorrow, the full inflation summary for July. The weekly increase is expected to be again 0.1% and, year to date, the increase is forecast at 4.7% (see note below). The price of wheat has jumped sharply on global markets – unreasonably given the surge in supply in the US – and Razgulay’s share price gained 6.3% on MICEX yesterday. But, inflation control is a key government priority and it can be expected to take whatever action may be required to keep the price of bread, and other basic foodstuffs, as low as possible this year. In international markets, the key reports will be the PMI Services report and the June retail sales update in the Eurozone while, in the US, the ISM non-manufacturing report will be the most keenly analysed. The weekly oil inventory report will also be published in the US. BP: The Return of the Prodigal Oilman The new and outgoing CEOs of BP are scheduled to meet with Deputy PM Sechin today to discuss the future of BP’s operations in the country. It will be the first time that Robert Dudley has been in Russia since his hasty departure during the BP-AAR dispute in 2008. There are a number of issues that we may reasonably expect to be on the agenda. But, what we can be sure of is that Russia has a specific agenda, i.e. a wish list, and will take full advantage of BP’s weakened state to press that. BP’s Russian businesses have been in a cul-de-sac for some time and its current bargaining position is a lot weaker today than it was before the Gulf accident. On the other hand, Russia needs to attract more investment into some areas of its energy sector and wants to promote its national energy companies on a global scale. If negotiations proceed well then both sides can gain considerably from recent events. The Kovykta gas deposit, controlled by BP via Russia Petroleum, will have to return to state control as the deposit is expected to be the source of gas exports to China. BP will likely be offered a strategic partnership role in that project similar to Total’s position in Shtokman and Shell’s in Sakhalin-II. The fact that BP owns a 50% stake in TNK-BP is a vexing issue with government as it sticks out as the major exception to the terms of the Law on Strategic Industries. The government may press BP to agree to a restructuring of that interest, e.g. a merger with Gazprom Neft has long been rumoured, or it may seek some other concessions from BP elsewhere. BP has lots of upstream and downstream assets around the World and Russia has made no secret of its desire to see the major state companies become more global and more diversified. On the other hand, BP will certainly be very keen to remain fully engaged in Russia. Much has been made of the fact that BP is more an American than a British company. Looking at BP’s share of production and reserves in Russia, the case can equally be made that it is a Russian operation. If BP is going to be squeezed more and more in the US, as recent reports suggest, then its Russian assets will become an even more important part of its future.

Inflation: Government’s key priority

The weekly inflation report will be published today and, either today or tomorrow, the inflation summary for July. The weekly increase is expected to be again 0.1% and the year to date increase is forecast at 4.7%. Normally in the summer, Russia expects to see deflation as food prices fall. This year, because of the extreme heat and, lately, the fires and smoke disruption, that may not be the case. In addition, the threat of higher wheat and, therefore, bread and pasta, prices is very clear. The Agriculture Ministry has forecast a big drop in grain production for the 2010-’11 (June-July) season; the harvest is now forecast at between 70-75 million tones from 97.1 million tons last year. That prospect has already led to a near 40% increase in world wheat prices in recent weeks and the fear of higher prices in Russia. But, inflation control is one of the government’s key economic priorities. Low inflation helps stimulate economic recovery and allows interest rates to stay low. Low rates is also key to government plans to promote recovery in the affordable housing market, the auto industry, in consumer sectors and amongst small businesses. Russia has enough stored wheat to meet the current projected shortfall for this year. It can be expected that stored grain will be released to the market to ensure the price of brad stays low and stable. If required, the amount of wheat to the export market will also be cut. Whatever it takes to keep domestic prices low will be done. The recent hike in the global market is also very overdone, albeit it would take a brave trader to actually short the price today. The threat of a supply cut from Russia, Ukraine and Kazakhstan has pushed the price higher. But, the US alone will add 62 million tons to its wheat storage this year and, by the end of this season the USDA forecasts that stored grain will total 187 million tons. More than enough to cover any shortfall elsewhere for years to come.

Trading yesterday

Moscow’s bourses, as usual, followed the international trend yesterday. Opening with a very brief gain, the indices headed south for most of the rest of the session. Investors in global markets reacted to a report that speculated China may tighten bank reserve requirements in October in order to curb speculative asset growth. The RTS performed better because of the ruble gains and closed with a loss of only 40 basis points (at 1,517.65). MICEX closed down 1.2% at 1,412.25. Stocks that had been strong in the recent rally, e.g. Gazprom and the oil majors, fell most. Razgulay and Raspadskaya were amongst the few exceptions. The former because of the wheat price gain internationally and the latter because an investor is buying recent under-achievers. The London IOB Index of GDR stocks has been more volatile and with a higher beta than the Moscow bourses because of the weighting of steel stocks. Yesterday, the IOB reacted more to the weaker opening in the US markets and closed down 1.2%. The steel names closed with a loss with the exception of Magnitogorsk which we regard as more defensive than others. It added 0.9% while, e.g. Severstal lost 2.3%. Uralkali gave back some of its recent gains to close down 3.5% at $22.59. The US equity markets, which were down about 0.1% when Moscow closed, closed off 0.5% (Dow) and 0.6% (S&P – at 1,119.1). The index of pending home sales fell 2.6% for July while economists were expecting a gain of 4.0%. A separate report on personal incomesand spending showed no change for June. The Commerce Department also reported that factory orders dropped 1.2% in June, more than double the 0.5% expected. All of which added to investor nervousness, albeit mainly justified indecisiveness of actions. Consistent with mid-summer.