Iran’s intention of increasing share of oil market makes $25/barrel oil seem possible

January 18, 2016

Last week saw further market falls sustained by persistent negative sentiment. Markets biased towards China, oil and commodities have suffered the most as these remain to be the areas of most concern to investors.

The oil market has continued its unrelenting fall, now consolidating below $30/ barrel. Many market participants believed that this level would never be seen again. Even previously bearish statements of $25/ barrel now look possible and may even be breached within the week. The most recent driver of the selloff has been the anticipation of the lifting of economic sanctions on Iran. Iran has the capability and has stated that it will add over 1m barrels to its oil exports once sanctions are lifted. Importantly, Iran is keen to regain market share and is willing to sell at any price to achieve this. As Iran has some of the lowest cost of production in the world, this has been a concern for all producers. While there continue to be many negative pressures in the oil market, the price is now reaching a level that looks like it will be unsustainable for any prolonged period. Such a low price will quickly take some production offline, cause corporate bankruptcies and provide a large incentive not to invest in further exploration as there are more risks associated with that sort of investment that will hopefully re-balance the market over time.

The Bank of England had its first interest rate decision of 2016 last Thursday. The nine policy makers unsurprisingly voted to maintain a 0.5% interest rate with a vote of 8-1. The committee stated that falling oil, energy and food prices have dampened the outlook for inflation relieving some of the pressure for an interest rate rise. The market now anticipates that a rate rise will not occur this year. The looser UK monetary policy, in contrast to the tightening in the US, has resulted in the pound falling to levels not seen since 2009. Some analysts are now forecasting that the GBP/USD rate will fall further to “Thatcher era levels”. In some ways, a weaker currency will benefit the UK, making exports more competitive and spurring inflation, therefore eliminating concerns over deflation. There have been concerns over the UK’s balance of trade and current account deficit being too wide; a weaker currency will go some way to improving these imbalances.

Index Open Close Change % Change
FTSE 100 5912 5804 -108 -1.8%
S&P 500 1922 1880 -42 -2.2%
Dax 9849 9545 -304 -3.1%
Cac 40 4333 4210 -123 -2.8%
Nikkei 225 17697 17147 -550 -3.1%
UK 10 Year Gilt Yield 1.791 1.699 -0.092 -5.1%

This week will see Chinese Q4 GDP announced along with UK inflation and retail sales for December , shining a light on the crucial Christmas retail period.

Also we have the World Development Report 2016 and launch of the World Economic Forum Global Risk Report 2016.

About Strawberry Invest

Strawberry Invest is the no-nonsense way to pick your own investments online. Choose from our range of investment accounts to suit you. Furthermore, use our knowledge hub to learn more about investing such as how to assess investment risk, how to measure investment return, how to pick investments, how to construct your investment portfolio and much more.