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By Halia Pavliva, Bloomberg

OAO Rosneft, Russia's state-owned crude producer, is breaking its link in the stock market with government-run OAO Gazprom (OGZPY) as the oil company pursues a takeover that would boost output in line with Exxon Mobil Corp. (XOM)

Rosneft, based in Moscow, posted the biggest weekly surge in a month in London trading, pushing its 120-day correlation coefficient with Gazprom to 0.52 on Oct. 19, the lowest in four months. The rally sent Rosneft shares to 7 times estimated earnings, the widest premium versus Gazprom since November 2010. The Bloomberg Russia-US Equity Index of New York-traded Russian shares climbed 0.3 percent last week to 98.19.

The oil producer offered to buy BP Plc (BP/)'s half of Moscow- based TNK-BP with cash and shares, amounting to about $25 billion to $28 billion, and has an initial accord to acquire the half held by the U.K. explorer's billionaire partners, two people with knowledge of the plans said Oct. 17. Absorbing BP's Russian venture would raise Rosneft's crude production to match that of Irving, Texas-based Exxon. Gazprom, Russia's dominant energy company, expects 2012 output to drop more than forecast on shrinking European demand.

"I would choose Rosneft over Gazprom because the premium should widen over time," Ed Kuczma, who helps manage $38 billion at Van Eck Associates Corp. and its Market Vectors Russia ETF (RSX), said by phone from New York on Oct. 19. "While Gazprom is facing declining demand in Europe, Rosneft offers much more room for upside."

RTS Index futures due in December slipped 0.9 percent to 147,300 on Oct. 19. The Bloomberg Russia-US Equity Index fell 1.3 percent to 98.19, trimming its weekly gain to 0.3 percent.

Matching Exxon

The Market Vectors Russia ETF, the biggest U.S.-traded exchange-traded fund that holds Russian shares, sank 1.7 percent to $28.91, cutting the weekly advance to 0.7 percent. The RTS Volatility Index fell 2.6 percent to 24.99.

Crude oil for November delivery tumbled 2.2 percent, to $90.05 a barrel on the New York Mercantile Exchange on Oct. 19. Futures are down 8.9 percent this year. Brent for December settlement dropped 2 percent to $110.14 a barrel on the London- based ICE Futures Europe exchange. Urals crude, Russia's chief export blend, sank 1.9 percent to $109.10 per barrel on Oct. 19, dropping 2.9 percent in the week.

The possible purchases would increase Rosneft's crude production to as 4.5 million barrels, and boost its market value to rival Gazprom's 3.7 trillion rubles ($120 billion). Exxon, the world's biggest oil company, pumped the equivalent of 4.15 million barrels of crude a day during the April-to-June period.

'Improve Things'

"There's pretty good reason to believe that having BP as a major partner can really improve things for Rosneft," Roland Nash, the head investment strategist at Verno Capital, which manages $200 million in Russian securities, said by phone from Moscow on Oct. 19.

Rosneft's 120-day correlation with Moscow-based Gazprom has stayed above 0.6 for the most of the last four years, after reaching a record-high 0.86 on September 2008. A reading of 1 means prices are moving in lockstep, while zero implies no relationship between the two benchmarks.

American depositary receipts of Gazprom, the world's biggest natural gas producer, lost 0.6 percent to $9.95 in New York on Oct. 19, reducing the weekly gain to 1.7 percent. The ADRs settled at a 0.6 percent discount versus the company's Moscow stock. Gazprom slipped 0.5 percent to 154.57 rubles, or $5. One ADR is equal to two ordinary shares.

Vladimir Putin, who returned to Russia's presidency for a third term in May, has used Gazprom to assert Russia's energy power during his first eight years in the Kremlin, winning pipeline deals and controlling former Soviet allies.

Lukoil Drops

American depositary receipts of OAO Lukoil (LUKOY), Russia's second-biggest oil producer after Rosneft, retreated 1.6 percent to $63.62 on Oct. 19., shrinking the advance to 2.6 percent on the week. The stock fell 0.7 percent to 1,974 rubles, or $63.90 in Moscow.

Oil may decline this week as U.S. inventories rose to the highest level for this time of year in at least 30 years, heightening concern that supply is outpacing demand.

Nineteen of 33 analysts, or 58 percent, forecast crude will decrease through Oct. 26. Seven respondents, or 21 percent, predicted a gain and seven forecast little change. Last week, 46 percent of analysts projected a decline.

Yandex NV (YNDX), Russia's biggest Internet company, was the worst performer on the Bloomberg-Russia Index last week with a 4.5 percent decline. Yandex slid 0.8 percent to $22.24 on Oct. 19 after Google Inc. (GOOG) reported profit and sales that missed analysts' estimates on Oct. 18.

"Google impacts the entire sector, including Yandex," Alexander Vengranovich, an analyst at Otkritie Financial Corp., said by phone from Moscow on Oct. 19. "People get nervous. They view Google's results as an early indication of a slowdown in revenue for Internet companies."

United Co. Rusal, the world's largest aluminum producer, was unchanged at HK$4.37 in Hong Kong trading as of 11:08 a.m. local time. The MSCI Asia Pacific Index slumped 0.6 percent today as Japanese exports fell more than economists estimated and corporate earnings missed forecasts.