The oil market took a sharp dive this morning, with Brent crude shedding over $8 a barrel, following the unexpected announcement of a landmark US-Iran nuclear deal. The agreement, brokered in Geneva after months of clandestine talks, promises to lift sanctions on Iranian oil exports in exchange for stringent inspections and limits on Tehran's enrichment programme. For a market that has been pricing in a $10-a-barrel risk premium since the collapse of the 2015 accord, this is a seismic shift.
The futures curve has twisted into contango, and the chatter on the trading floor is about a wall of Iranian crude hitting the market within weeks. Global equities have responded with a sigh of relief: the FTSE 100 surged 2.3% by midday, led by energy-intensive sectors such as airlines and chemicals.
British energy security, a perennial bugbear for Westminster, gets a welcome shot in the arm. The deal means diversifying away from Russian gas and volatile Middle Eastern supplies; it also puts downward pressure on domestic petrol prices, just as the Bank of England frets over sticky inflation. But let us not get carried away.
The sceptic in me recalls the last 'historic' accord, which unravelled spectacularly. The true test will be whether Iran's Revolutionary Guard Corps, which controls a significant chunk of the economy, will allow the oil to flow freely. Moreover, the US election cycle means this deal could be reversed with a stroke of a pen.
For now, however, the market is celebrating: the gilt yield fell 12 basis points, and sterling strengthened as capital flows towards London's energy-heavy index. The bottom line: cheap oil is a tax cut for consumers and a headache for fiscal hawks who worry about the deficit. But for the average Briton filling up at the pump, relief is on the way.
