Iran, China, Greece factors push oil down
The downside break below $56.80 a week ago was a critical indicator that the price of WTI was set for an aggressive decline and the bears have since managed to push the price down as low as $50.57.
There’s a combination of different factors that are merging together to weaken investor sentiment towards WTI, but it does appear that the main inspiration behind the recent selling is optimism that progress over an agreement on Iran’s nuclear program is being made.
An agreement would see economic sanctions on Iran eased, meaning that up to a further two million barrels a day could be pumped into the market. However it’s important to point out that it would require time for Iran to boost production levels to their potential output.
Investor sentiment is continually plagued by oversupply concerns and bearing in mind that these remain at the same elevated levels as they have always been, the oil markets were always vulnerable to a sudden reversal of previous gains. Aside from oversupply concerns, what I would say is contributing to this sudden selling pressure is anxiety that demand for WTI is declining.
One of the issues with the ongoing situation in Greece is that the wider implications of a country leaving the eurozone or at least defaulting on their loan repayments is largely unknown, meaning this could have a knock-on effect outside of Europe that would lead to reduced demand for WTI. In addition to this, declining economic momentum is continuing to be the running theme of the China economic story in 2015 and with China being among the largest importers of crude anyway, slowing growth in China would lead to less demand for WTI.
The downside pressure in WTI is also inspiring selling momentum in currencies with economies linked to crude exports, such as the Canadian Dollar, Mexican Peso, Malaysian Ringgit and Russian Ruble.
It is the emerging market currencies that are going to feel the most pain over the selling pressure in WTI and I will be keeping an eye on both the Malaysian Ringgit and Indonesian Rupiah over the coming days. The problem that the emerging markets are facing is that the resumption of selling in WTI is happening at the exact same time as USD appetite is picking up with the Federal Reserve interest rate rise expected in the next couple of months.
This is the exact same combination that led to the emerging market currencies declining at a rapid rate at the beginning of 2015, and it does look like recent history is repeating itself once again. It would also not surprise me if the lower price of oil weighs on investor sentiment towards futures, which are already at risk to vulnerabilities over the continual uncertainty in Greece.
Despite the continual uncertainty in Greece and the risks of a Grexit actually intensifying following the Greek referendum results, there remains no sign in the slightest for increased appetite towards purchasing gold. The metal dropped to a near four-month low at $1,147 yesterday (7 July) and if we fall just over another $5, we will record another yearly low.
I wouldn’t say the news that former Greek finance minister Yanis Varoufakis had resigned, and optimism that this could inspire a deal between Greece and its creditors to finally be reached, has anything to do with the losses in gold early this week.
There is simply no buying interest towards the metal as we approach the timing of a US interest rate rise. Rather than seeing the decline in gold as being inspired by Varoufakis’ resignation and increasing optimism that a deal over Greece might be easier to conclude, I prefer to think that the losses in gold are linked to the possibility that Wednesday evening’s FOMC Minutes might contain an unexpected hawkish comment about US interest rates.
Jameel Ahmad is FXTM chief market analyst