by
HDFC Bank Market update
Treasury
Economics Research
Markets
initially rejoiced on the news that an interim deal had been reached between
the P 5+1
countries
(China, France, Germany, the Russian Federation, the United Kingdom and the
United States) and
Iran on 24th November 2013 in Geneva.
While the
deal might not be a perfect one, it is definitely a historic one and step in
the right direction.
However, the
key point to note is that the deal is “interim” as the agreement is only valid
for a period of six (6) months. There need to be further
negotiations before a more comprehensive deal can be reached.
Global crude
oil prices corrected sharply in response to the deal but appear to have
reversed subsequently as investors remain
concerned about whether or not the short‐term
deal could have a significant effect in increasing
overall supply of oil.
What was
negotiated?
Under the
terms of the deal,
· Iran has
committed to halting above 5 % levels of enrichment and neutralizing its
stockpiles of
near 20 % uranium. This level of enrichment is more compatible with a
civilian
nuclear program rather than a nuclear power program.
· Iran can not
use its next generation centrifuges that are used for enriching uranium.
· Iran can not
install or / start up new centrifuges and its production of centrifuges will be
limited.
· Iran will
halt work at its plutonium reactor and will provide unprecedented transparency
and intrusive
monitoring to its nuclear facilities to the international community.
In return, as
part of this initial step, Iran will get the following concessions:
· The P5+1 is
to provide limited, temporary, targeted, and reversible relief while maintaining
the vast bulk
of sanctions, including the oil, finance, and banking sanctions architecture.
· Iran will
have access to around USD 420 Crore worth of crude sales from frozen overseas
bank
accounts.
· The deal
suspends certain sanctions on gold and precious metals, Iran’s auto sector, and
petrochemical
exports, potentially providing Iran approximately $ 150 Crore in revenue.
· No new
nuclear related sanctions will be imposed for six months; however purchases of
Iranian oil
will remain at their currently significantly reduced levels – levels that are
60%
less than two
years ago and well below its overall capacity level.
· The EU had
banned the European Protection and Indemnity (P&I) Clubs from providing
Iranian oil
carriers with insurance and reinsurance. These sanctions effectively ‘stymied’
Iranian
exports. However, as part of the deal the EU has decided to temporarily lift
this
ban.
Putting
the relief package in perspective
The deal is
likely to provide only minor respite for Iran. For one, the toughest sanctions
continue to
hold to
ensure that Iran does not step‐up
its nuclear program during the negotiation period.
In total, the
approximately USD 700 Crore in relief is a fraction of the vast majority of
Iran’s foreign
exchange
holdings (USD 10,000 Crore) that white‐house
officials have confirmed are likely to remain
inaccessible
or frozen by sanctions.
The EU has
maintained its ban on crude oil imports from Iran.
The most
important thing to note is that in the next six months, Iran’s crude oil sales
cannot
increase.
Iran has been, effectively, permitted approximately 1 million bpd in oil sales
that is
significantly
lower than it overall capacity and will likely result in continuing lost sales
worth
an additional
$4 billion per month. This in turn could mean that there is likely to be a very
limited
increase in overall supply of crude oil to the global markets.
Treasury
Economics Research HDFC Bank Team
Abheek
Barua - Chief
economist
Phone number:
+91 (0) 124‐4664327
Email ID:
abheek.barua@hdfcbank.com
Shivom
Chakravarti - Economist
Phone number:
+91 (0) 124‐4664354
Email ID:
shivom.chakravarti@hdfcbank.com
Tanvi Garg
- Economist
Phone number:
+91 (0) 124‐4664338
Email ID:
tanvi.garg@hdfcbank.com
Rishi Shah
- Junior economist
Phone number:
+91 (0) 124‐4664336
Email ID:
rishi.shah@hdfcbank.com
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