Gazprom Vs. Oil Price: Both Lose?

The Russian economy remains heavily linked to the price of crude oil, and recent estimates state that gas prices will drop by 37% in Q1, 2016 owing to weakness in crude oil. The long-term effects of this on the stock price are clearly negative because it will drop prices to levels not seen since 2005. Gas prices for the Russian energy giant are slated to decrease to $180 per 1,000 m³. To put that into perspective, consider that the price for gas was $284 per 1,000 m³ in 2014. However, Europe is heavily reliant on Russia for its natural gas supply, and an estimated 30% of all European gas consumption is supplied by the Russian energy giant. In October 2015, Gazprom analysts averaged out European revenues for gas at $200 per 1000 m³, but that was based on an oil price of $50 per barrel. That we are now looking at oil prices in the region of $30 – $32 per barrel is an exceptionally important point to bear in mind. The below graphic reflects plunging stock prices since June 2012, with very little bullish momentum driving stock prices at any time with the exception of the latter half of 2014.

gaz prom

Gazprom is currently trading at a price of $3.36, with a 52-week trading range of $2.97 on the low end and $6.25 on the high end. The company has a market capitalization of $39.53 billion with a P/E ratio of 4.33 and an EPS of 0.78. The 1-year target price of the stock is $9.80 per share. Based on the current market conditions, Gazprom is surprisingly bullish. The reason for this is the low cost of the shares and the high earnings potential when commodity prices increase. The inevitable turnaround is going to happen when oil and gas prices start rising, and there is tremendous value to be gained from this investment. On a rating scale of 1.0 (strong buy) to 5.0 (strong sell), the mean recommendation for the stock this week is 2.0. This places the stock as a strong buy and the mean target price is $9.80 with a high target of $9.80 and a low target of $9.80.

Based on analyst opinion, it makes sense to go long on the stock as an investment option, but how does this play out as a binary option trade?

To answer that question, we need to understand what short-term indicators will influence the pricing of Gazprom and how we can place trades on the stock accordingly. On 12 January 2016, there was an important upgrade by JP Morgan. The research firm decided to upgrade its forecast of Gazprom from an underweight rating to a neutral rating. In all investment decisions that I make with call and put options on stocks, the most recent upgrade or downgrade is always an important one. JP Morgan’s rating is recent enough to warrant a call option on Gazprom, and given the bullishness in the stock price (+0.60%), call options appear to be the right decision. Since binary options are short-term trading opportunities, I’m going to recommend that traders place call options on Gazprom for the week, given all of the rumblings taking place in the oil market. We have seen the following tectonic changes in oil prices taking place recently:

  • The Iraqi oil Minister is expecting an agreement to be hammered out between Russia and Saudi Arabia vis-a-vis cutting crude oil supply
  • Oil prices have rallied substantially over the past several days, despite being hampered by reports of rising inventories in the US (remember that US inventories are higher because of maintenance work at US oil production facilities)
  • The bitterly cold weather across the US is increasing the demand for natural gas and crude oil, and the winter is naturally good for business across Europe, North America and Russia

Another consideration is a potential deal for Gazprom in Lithuania. The Energy Minister of the country, Mr Masiulis recently commented that he would be interested in purchasing liquefied natural gas provided that there is economic flexibility from Gazprom in this regard. There is no agreement on prices yet, but discussions are underway between Lithuania, the Russian energy giant and a Norwegian supplier for the purposes of long-term gas contracts.

Based on all of the above information, the case can be made for call options on Gazprom as a binary option trading opportunity.

Disclosure: None.

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