Forex Response to Increased Iranian Oil Exports

The price of oil fell by half over the last year. Many countries that earn most of their hard currency from exporting oil have seen the value of their own currencies fall substantially. A few months ago we wrote about trading the Colombian peso as a case in point. Today the Iranians have agreed to curtail their nuclear development program and submit to UN inspections. The end result of this will be increased Iranian oil exports. For Forex traders the question will be the Forex response to increased Iranian oil exports.

Where Will Oil Prices Go and Whose Currency Falls?

The Financial Times notes that increased Iranian exports will put other exporters under pressure.

Estimates of Iranian output rising by as much as 1m barrels a day within one to two years will “inevitably depress prices”, Moody’s rating agency said in a report, undermining the creditworthiness of exporters with weak financial buffers, such as Russia, Venezuela, Nigeria, Bahrain and Oman.

The deal, which will also allow Iran to regain access to as much as $150bn in frozen assets and the global financial system, could increase output to 4m b/d by 2017, Moody’s said, citing the Institute of International Finance.

Iran could also quickly release 30m barrels from floating storage into global markets, depressing prices if there is no correspondent increase in demand.

The expected increase in Iranian production could “temper” the rating agency’s $5 a barrel price increase previously forecast for 2016. Oil-dependent producers are already reeling under the pressure of lower energy prices.

Experts believed that oil prices would rise a bit by 2016 but Iranian oil on the market will likely turn that around. The Forex response to increased Iranian oil production will be most felt in the nations mentioned in the article, Russia, Venezuela, Nigeria, Bahrain and Oman as well as others such as Angola and Colombia who derive the bulk of their hard currency from exporting oil.

Who Gets Hurt the Worst?

Bloomberg notes that the Colombian peso declines to its worst in three months.

Colombia’s peso fell to a three-month low after prices for oil, the nation’s biggest export, tumbled amid mounting concern over Greece and China.

The peso weakened 1.2 percent to 2,670.30 per dollar at the close in Bogota, the lowest closing level since March 16. The drop was the biggest among 31 major currencies tracked by Bloomberg after the Russian ruble.

Crude fell along with metals and grain as Greece’s vote against further austerity and China’s stock turmoil shook confidence in global economic growth. Oil, which fell the most in three months, accounts for about half of Colombia’s exports and 17 percent of government revenue.

The Forex response to increased Iranian oil exports does not just have to do with Iran but also with a slowing economy in China and thus lower demand for crude oil.

The Chinese Economy

The problem in dealing with China is lack of transparency. Although the government claims that the rate of growth is back up to 7% many are skeptical. Forbes speculates on a Chinese commodities crash, not just oil but everything else that the nation imports.

It’s entirely possible that the Chinese economy is in the middle of a massive crash: there are well informed people asserting just that.

As to what is happening in China the Streetwise Professor (otherwise, Craig Pirrong, something on an expert in these matters), as I’ve already pointed out, is less than ecstatic about the prospects:

Now think of how panicked the Chinese must be to implement measures that dwarf TARP. That’s what economists call revealed preference. Or, in this instance, revealed panic.

This gives the lie to official statistics, which showed a (patently unbelievable even absent this massive stimulus) .1 percentage point decline in the growth rate. Also giving the lie to the official statistics is the collapse in China-driven commodity prices, notably iron ore and coal, and oil as well. The slowdown in commodity economies further discredits the official Chinese data.

If you believe this story you can expect oil fall father. The Forex response to increased Iranian oil exports will be multiplied by a global economic slowdown due to China’s slowing economy.