Monday, July 6, 2015

Oil price through the floor on Iran talks | Low oil is bad for the Euro

While we have been focussed on developments in Greece, another negotiation drama has been playing out between the US and Iran, over a possible agreement on Iran’s future allowed nuclear development capacity in return for the lifting of western sanctions, which have had the effect of seriously depressing that nation’s economy.

While there are still some obstacles to a finalised deal, not least the final agreement of both the Iranian supreme ruler, the Ayatollah Ali Khamenai, and the US Congress to any outcome that is reached by the US Secretary of State, John Kerry, and his Iranian counterparts, the markets seem to be taking the view that something in the form of a finalised agreement is close.

The lifting of sanctions on Iran would allow Iranian oil to flow, after a lapse of many years, onto the world markets.

At market close yesterday, Light, Sweet Crude for August delivery was trading at $52.98 per barrel. This is a sharp drop from the level of close to $60 at which it had been hovering until the middle of last week.

Low oil is bad for the Euro

And yesterday too, the price of Iron Ore fell towards $50 per tonne, moving dramatically away from the $60 per tonne it seemed to have settled at in the recent past.

The reduction in commodity prices, most notably oil, is bad for the Euro. It means that deflationary pressure will persist. While low energy prices are inherently a good thing for the global economy, in that they result in more cash in consumers’ pockets, they are detrimental to inflation forces. Central banks the world over are worried about deflation, or a negative inflation rate.

This means that the ECB’s weapon of choice against deflation, Quantitative Easing, will run and run. This has the tendency to depress the value of the Single Currency.

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