by
HDFC Bank Market update
Treasury
Economics Research
An interim
deal had been reached between the P5+1countries (China, France, Germany, the
Russian Federation, the United Kingdom and the United States) and Iran on 24th
November 2013 in Geneva.
· Iran holds
the worlds fourth largest proven oil reserves and the worlds secondlargest
natural gas
reserves.
International
sanctions and the lack of foreign investment and technology are affecting the
sector profoundly.
One of the
upshots from the deal could be more engagements from the likes of Total S.A and
Royal Dutch Shell to invest in Iran’s oil
and gas
sector.
· As part of
the agreement, since the European Union has lifted the ban on insurance for
tankers
transporting Iranian oil, it is likely to make it easier for Iran’s
international
customers to
take delivery.
For instance,
officials from Indian Oil Corp., Hindustan Petroleum Corp. and Mangalore
Refinery & Petrochemicals Ltd. have reportedly expressed that the removal
of restrictions on shipping cover will enable them to purchase contracted
volumes more
easily, however, they donʹt intend to buy more than previously planned.
Nevertheless,
the removal of the ban is likely to mean that plans that the government had
to create a
special insurance cover for oil shipments from Iran are likely to get shelved.
Besides, this
development will in all probability make it legal for P & I insurance clubs
and
reinsurance
companies such as Munich Re and Swiss Re to insure Iranian oil cargoes if they
want.
· The six (6) month accord may also crack open the door
to trade with Iran for gold traders in
Turkey, oil
refiners in India and automakers.
Companies
such as Peugeot and Renault have
welcomed the
move as a potential re‐entry
to the Iranian market.
Implications
on Oil prices
After a knee
jerk reaction global crude oil prices have moved higher on the realization that
the
agreement
does little to lift Irans oil exports by a significant amount.
Moreover,
markets seem to be sceptical about the possibility of a final agreement once
the interim deal expires in six months. Even
though, the
diplomacy might appear determined and optimistic that a more permanent solution
will come
through, there are still a number of obstacles to a final deal.
For one,
there are growing rumblings that the Arab world is not so excited about the
Iran deal.
The U.S. long‐time allies Israel and Saudi Arabia
are reportedly considering new alliances to
contain their
common enemy i.e. Iran.
While
expressing his disapproval of the deal, for instance,
the Israeli
Prime Minister Benjamin Netanyahu slammed the Geneva deal as a “historic
mistake,”
who later of
course was reassured by President Obama of his firm commitment to Israel.
Secondly,
some of the media reports suggest that some of the American leaders in the US
House
of Congress
are still contemplating a further tightening of sanctions. Given these factors,
it
wouldn’t be
prudent to completely rule out the possibility that the deal can be torpedoed
eventually by
such factions.
The positive
effect of this deal is that it could soften the risk premium on oil prices and
help (to an
extent) to
reduce geo‐political
tensions in the region. However, only if a more permanent deal that
helps Iran
raise its productive capacity and increase overall supply of oil in the market,
will there
be a more
sustained downward move in oil prices.
Besides, as
Iran is a member of OPEC any increase in its output could be met with supply
cuts from other member nations such as Saudi
Arabia or
other members of the group in an order to arrest the slump in prices.
The notion of
a ‘political break even’ for oil prices is certainly an influence on how middle‐east oil
producers try
to set oil prices and production levels. Since these countries are largely
dependent on
oil revenues
for all their fiscal expenditures, this political break‐even is a price‐level that is
compatible
with their projected expenditures (including welfare spending that might become
necessary to
battle growing unrest in the region). Our sense is that level is the 95-100 USD
/ bbl for
Brent Crude.
This could set a floor to global oil prices.
The upshot is
that the overall effect on oil prices is likely to remain limited in the near‐term. The
state of
global demand as well as global monetary policy (especially with regards to
when the Fed
might taper
QE 3) is likely to remain the more fundamental drivers for oil prices in the
near term.
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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