Debate: Should traders feel cautious about the oil price in light of the political unrest in Iran?

Unrest Continues After Iranian Presidential Elections
Source: Getty

Should traders should feel cautious about the price of oil in light of the political unrest in Iran?

Yes, says Chris Beauchamp, senior market analyst at IG Group.

At first glance, the Iran protests would seem to provide yet another catalyst for an upward move in prices.

The thinking goes that more protests will lead to a crackdown, and then further protests and disruptions that spread to oil-producing regions and potentially hit supply.

However, this probably has things backwards. Instead, we should look to history. Since 1979, the imperative in Tehran has been holding on to power, almost regardless of the cost.

As a result, the probability is that the regime looks to assuage popular discontent through concessions, in the form of higher public expenditure and subsidies to help cut the cost of living.

The easiest way to do this is through oil exports; indeed, if the regime judged its survival to be in danger, it could even opt to abandon adherence to Opec quotas and let the commodity flow freely.

In markets, it pays to think beyond the obvious, and here being sceptical about an oil price spike following the protests looks to be the way to go.

No says Paul Domjan, head of research, analytics and data at Exotix Capital.

While short-term sentiment about political stability in Iran may be one reason for upward momentum, it is only one of many.

Production disruption has hit Libya and the North Sea, and, prior to Christmas, investors were already betting on a price increase. From the other side, oil production outside of Russia and Opec is growing, particularly in North America, ensuring supply remains strong.

The July 2015 Iran sanctions deal has been widely welcomed, so despite Donald Trump’s tough rhetoric, there is little appetite for its reversal, nor for an imposition of new sanctions. Since the agreement, Iran’s production has risen by nearly one million barrels per day, to 3.8m, with almost half for export.

The current protests already risk undermining President Rouhani’s government, and the international community will not want to undermine it further by supporting Trump’s call for new sanctions.

The oil price could go either way this year, but Iran will not be what drags it.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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