Daily Insight – Iran deal aftermath

by: Hans van Cleef , Georgette Boele

  • Iran nuclear deal led to a drop in oil prices and oil-sensitive currencies…
  • …as well as the yen and gold, which often benefit from geopolitical risks
  • We expect oil prices to drop in 2014, but we are neutral in near term

Oil prices under pressure after the Iran deal…

Brent oil price dropped by roughly 2% on Monday morning as the market reacted to the Iran nuclear deal. This initial agreement was seen as a positive first step and buys time for the negotiators to work towards a more comprehensive settlement. As a result of the agreement, Iran is able to increase its oil exports somewhat and gets access to some of its financial assets which were frozen due to the sanctions. The international community, on the other hand, can inspect the Iranian nuclear sites and Iran promised to freeze its nuclear enrichment processes. This agreement does not mean that there will be much more oil on the market. At this moment, Iran exports approximately 2.6 mb/d. Even if there were to be a modest increase, It could be that Saudi Arabia cuts back some of its own production to balance the market. The drop in oil prices will most likely not be followed by more downward pressure in the coming weeks based on this event. The negotiations will continue during the coming months and until an update is given, the market will most likely be driven by the traditional drivers. An uncertain factor will remain the stance of Israel and Saudi Arabia. Israel in particular was not supportive of the new agreement, and more hawkish comments could lead to an increase of the risk premium again. Our expectation for the Brent oil price is rather neutral for the remainder of the year, but prices could decline in 2014 as supply prospects increase and the geopolitical risk premium falls (please see yesterday’s Global Daily Insight for more on this). The Brent/WTI spread narrowed marginally as Brent is more sensitive to the situation in the Middle East.

…dragging down oil sensitive currencies

Currencies with a high oil sensitivity such as the Norwegian krone (NOK) and to a lesser extent the Canadian dollar (CAD) and the Russian rubble (RUB), moved lower in line with lower oil prices on Monday morning. But they have recovered afterwards. The NOK was the most out of favour losing more than 1%. The NOK’s vulnerability reflects that among the currencies, the NOK has the highest correlation to oil prices, mainly because energy has a relatively heavy weight in its exports. This is also the case for the Russian rubble, but there is one important difference. The NOK is freely floating while the RUB is a highly managed currency. The Canadian dollar is also freely floating, but Canada’s economy has exposure to a wider range of commodities, unlike Norway’s.



Yen and gold also decline due to easing risks

Meanwhile, the yen also declined, reflecting that it is a safe haven currency, which tends to benefit from geopolitical risks. Similarly, gold prices also came under pressure as the Iran deal has reduced its safe-haven appeal, while lower oil prices reduce its appeal as an inflation hedge. However, during the day prices recovered. We believe that any recovery will be temporary and soon prices will fall under heavy pressure again. In the same vein, we remain negative on the yen, given that we expect investor risk appetite to continue on a positive trajectory, while we also see continued and more aggressive BoJ asset purchases, in contrast to the Fed that is set to taper in coming months.