Last month, 6 of the largest world powers reached a 20-month agreement on Iran. Since 2006, these countries placed sanctions against the country for its increase nuclear activity. On its part, Iran has argued that the nuclear activities are meant to boost the economy in terms of power, medicine, and manufacturing. The deal, which is yet to be put to paper has opened a Pandora’s Box especially to the financial markets.
In the United States, the republicans have voiced their opposition to the deal arguing that Iran cannot be trusted in the face of global terror. They also argue that the deal would come in between the cordial relationship between the United States and Israel. Iran has publicly stated that they would wish to remove Israel from the world map.
With the deal, sanctions placed against the country will be lifted and the country can now export its oil and uranium resources. According to the United States Energy Information Administration, Iran has 10% of the global oil reserves. Meanwhile, the country will be able to import goods from the 6 countries.
After the deal was announced, the first major reaction was on the oil market. Oil is currently trading at the lowest levels in 6 years because of oversupply by the OPEC countries. Iran as a member of OPEC will start pumping millions of barrels of crude oil on a daily basis. Many experts believe this will increase the glut and therefore push the oil prices downward.
The drop in oil prices is correlated with a number of oil companies such as British Petroleum (BP), Chevron, Exxon Mobil and Royal Dutch Shell among others. These companies do not benefit from the reduced oil prices and have in many occasions cut their costs. Their share prices have fallen significantly. Therefore, for a day trader, trading the oil correlated sectors calls for a lot of caution.
Analysts at major investment banks such as JP Morgan, UBS and CITI have all forecasted that the ongoing oil prices fall will continue especially after the Iran deal. Most analysts have reduced their forecasts to about $30 a barrel. In addition, most oil companies have also been downgraded by leading investment banks.
The deal will in fact affect other sectors of the economy. In the United States, fracking companies making money from shale have also been downgraded. In a recent conference, billionaire David Einhorn stated that the fracking industry is not sustainable because of the increased costs and reduced margins. In fact, investors in the fracking industry have suffered incredible losses the last couple of years.
Other companies likely to be affected are in the renewable energy. Most Americans use renewable energy such as solar to save costs. With the reduced oil prices, these companies have fallen significantly. For instance, shares of Solar City have fallen from $72 to $43 while those of First Solar have fallen from above $70 to less than $45.
To a large extent, global currencies will also be affected if the Iran deal will be affected. After the deal was announced, the dollar rose. According to John Kerry, the dollar will cease to be the global currency reserve if congress fails to pass the bill. However, many analysts are of the differing opinion about the dollar. According to Boris Schlossberg, a leading FX analyst, the dollar strength cannot be compromised because of the oil deal. Other currencies of oil exporters reacted to the deal by going south. On the other hand, currencies of major trading partners of Iran such as Turkish Kron reacted by trading higher.
The Iran deal is a serious matter that will have serious implications to the financial market. Day traders need to caution themselves and probably avoid sectors likely to be affected if the deal goes on or if it is rejected by the congress. The good thing is that if it is passed, chances are that it will take some time before Iran starts to pump the oil which gives traders a good opportunity to allocate their trades to other sectors.