After the revolution in Iran in 1979 the USA placed sanctions on the country and expanded them in 1995. Iran in modern times has pursued a nuclear program and in 2006 the UN security council placed further sanctions targeting oil and gas after they refused to suspend their uranium enrichment program. On January 23 2012 the UN security council banned imports of Iranian crude oil and petroleum products.
Iran has been in talks to have their sanctions lifted and on 2nd April 2015 representatives from China, France, Russia, UK, USA and the EU met in Lausanne Switzerland where they reached a provisional agreement framework that when finalised would lift most of the sanctions in exchange for limits on Iran’s nuclear program.
Lifting Iranian sanctions will have a significant impact on the world oil market. Iran’s oil reserves are the fourth largest in the world and they have a production capacity of about 4 million barrels a day, making them the second largest producer in OPEC. Iran’s oil reserves account for approximately 10% of the world’s total proven petroleum reserves, at the rate of the 2006 production the reserves in Iran could last 98 years. Most likely Iran will add about 1 million barrels of oil a day to the market and according to the world bank this will lead to the lowering of the crude oil price by $10 per barrel next year.
According to Data from OPEC, at the start of 2013 the largest oil deposits are in Venezuela being 20% of global oil reserves, Saudi Arabia 18%, Canada 13% and Iran 9%. Due to the characteristics of the reserves it is not always possible to bring this oil to the surface given the limitation on extraction technologies and the cost to extract.
As China’s increased demand for natural gas as an alternative to fossil fuel further reduces overall demand for oil, the increase in supply from Iran and the continuation Saudi Arabia putting more oil onto the market should see the price drop over the next 12 months and some analysts are predicting prices will fall into the $30’s.
As the price of oil fluctuates it is important to identify which currencies correlate closely with commodities. The Australian Dollar, Canadian and New Zealand Dollar are the top three currencies who correlate most tightly with commodities the Swiss franc and the Japanese Yen to a lesser extent, but still correlate somewhat with commodities.
When trading currency markets keep an eye on the oil price and an eye on the markets for signals of price change to watch how quickly it changes, keep an eye on the lag.
Be aware, commodity prices can drive currency prices.