VanEck Vectors Russia ETF To Be Hit By Oil Outlook – VanEck Vectors Russia ETF (NYSEARCA:RSX)

With the OPEC meeting scheduled for July 2 and the G-20 summit for June 28 and 29, the next few days are going to be very important for the VanEck Vectors Russia ETF (RSX). The ETF is heavily weighted towards the energy sector, and so, it will be affected in the near term by movements in international crude oil price, which in turn will be affected by the two meetings. For the longer term of around one year, we expect RSX to be affected by the longer-term oil outlook, US presidential elections and normalization of Gazprom (OTCPK:OGZPY) stock movement. Our investment recommendation is based on a period of one year, and we prefer to not give trading advice for the short term.

Next One Week Crucial for RSX in the Short Term

RSX is positively correlated with international crude oil prices (see chart below) because its holdings are concentrated in the energy sector. Two important events in the global arena – the OPEC meeting and the G-20 summit – are likely to have a pivotal effect on crude oil price in the coming days. Consequently, RSX is likely to be very volatile in the coming days following the movement in crude oil price.

The meeting of the US and Chinese leaders on Saturday, June 29, is likely to give signals of where the trade war is headed, which will have a direct impact on oil prices. We expect no breakthrough in this meeting, so we believe it will have a bearish effect on oil price.

On the other hand, we expect OPEC+ (meaning OPEC plus Russia and other non-OPEC allies) to rollover the production agreement currently in place. Saudi Arabia had indicated on June 7 that OPEC+ was close to agreeing on extending the current production cuts to the second half of 2019. If this scenario does, in fact, come to pass, then we may see a slight relief rally.

Bearish 1-Year Oil Outlook Translates to Bearish Outlook on RSX

For the next one year, we expect international crude oil prices to trend downwards as the effects of the trade war intensify. There are signs of economic slowdown already visible in developed countries, and investors are expecting the US Fed to cut rates to counter the slowdown. We expect the global economy to slow down in the next one year and to consequently drag crude oil prices.

As RSX moves in tandem with oil price, our bearish 1-year oil outlook translates into a bearish 1-year outlook on RSX.

US Elections to Weigh on RSX

We expect RSX to be increasingly affected by politics in USA as the country’s presidential elections approach. USA’s elections are scheduled for November 3, 2020, wherein the current president will seek re-election. We expect sanctions on Russia to be as much election rhetoric in 2020 as they were in 2016. It is too early, however, to give a call on who will succeed in the elections; therefore, we will keep an eye on this factor before determining whether this could be a positive or negative trigger for RSX. One thing we’re sure about is that the fund’s volatility will increase in USA’s election year.

Ending of Gazprom’s Rally to Take Away Support for RSX

RSX’s price has recently been helped by the rally in its biggest holding, Gazprom. Gazprom has recently surged due to its announcement to increase its payout to as much as 50% of annual net income in the mid-term. The stock has also rallied because investors expect a change in management. Once the excitement dies out, which should be soon, the stock will settle at a higher price and bring to an end the push it had been giving to RSX.

In Conclusion, RSX Likely to Trend Downwards for the Next One Year

Keeping in mind the three most important factors that are likely to affect RSX in the next one year, i.e., oil price, US elections, and Gazprom, we expect RSX price to trend downwards in the next one year. We expect the fund’s price to fall in the range of 4-6% to $22.9-22.4 in the next 12 months. Consequently, we advise holders of RSX to reduce their exposure to the ETF and investors who don’t already have positions in the ETF to stay away from it. Our investment recommendation is based on the period of one year, and we prefer to not give trading advice for the near term.

Risks to the Thesis Include Oil Price Increase

One significant risk to our thesis is an increase in oil price, instead of the fall that we are expecting. Geopolitical factors in the wake of Iranian tensions and easing of trade relations between USA and China can both lead to higher oil prices. As RSX is positively correlated with oil, higher crude prices can lead to higher RSX price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.