In a move that has sent shockwaves through global markets, oil prices have collapsed by over 12% following the announcement of a historic nuclear deal between the United States and Iran. Brent crude, the international benchmark, slumped to $52.40 a barrel, its lowest level in over a year, as traders priced in the prospect of a deluge of Iranian crude returning to an already oversupplied market. The FTSE 100, meanwhile, surged by 3.5%, led by airlines and consumer goods stocks, as investors cheered the prospect of lower fuel costs and reduced geopolitical risk.
For years, Iran has been sitting on the world's fourth-largest oil reserves, locked out of global markets by sanctions. The deal, which lifts those sanctions in exchange for curbs on Tehran's nuclear programme, could see Iranian production ramp up by a million barrels a day within months. That is precisely what the market does not need right now. The spectre of oversupply, already haunting OPEC+ meetings, has become a reality. The cartel's attempts to prop up prices by cutting output look increasingly futile when one of its own members is about to flood the market.
But the implications go far beyond the price of petrol. This deal represents a fundamental shift in the geopolitics of energy. For decades, the 'Iran risk premium' has been baked into oil prices, costing consumers and businesses an estimated $50 billion a year. That premium has just evaporated. The market is pricing in a new era of energy security, one where the threat of a blockade in the Strait of Hormuz recedes and the Middle East's vast reserves are more freely available. Capital that was fleeing the region into safe havens like gold and US Treasuries is now rotating back into risky assets, boosting equities across the board.
Yet, this is a trade-off. Lower oil prices are deflationary, and while that may please central bankers in the short term, it wreaks havoc on the fiscal positions of petrostates. Saudi Arabia, Russia, and Venezuela now face the prospect of gaping budget deficits. We have already seen the Saudi sovereign wealth fund sell down its stakes in major tech companies to plug a hole in its accounts. Expect more of that. Meanwhile, the fiscal arithmetic in Westminster becomes marginally easier if the cost of filling a tank falls, but the long-term implications for tax revenues from North Sea oil are bleak.
The Bank of England will be watching this closely. Lower oil prices depress headline inflation, giving them room to keep interest rates lower for longer. That is good news for homeowners with mortgages, but it spells trouble for the pound. A dovish central bank in a world where the Fed is raising rates is a recipe for capital flight. Sterling has already slipped by a cent against the dollar this morning. The market is sniffing out the yield differential.
But the real story here is the market's reaction to political risk. The US-Iran deal is a masterstroke of strategic diplomacy, but it is also a reminder that in the world of high finance, peace pays. The cost of war, or even the threat of it, is ultimately borne by the consumer. This deal slashes that cost overnight. For the City, that is a bottom-line windfall. For the global economy, it is a reprieve from the creeping stagflation of the past year. But do not pop the champagne corks just yet. Markets have a habit of pricing in perfection, and this deal is far from perfect. There will be implementation difficulties, cheating, and a host of unintended consequences. The only certainty is volatility.
For now, though, the bulls are in charge. Oil is cheap, shares are rising, and the world feels a little bit safer. That is a combination that does not come along often. Savour it while it lasts.
