Opportunities after the Iran Nuclear Deal – oil markets jittery, other sectors upbeat

Opportunities after the Iran Nuclear Deal – oil markets jittery, other sectors upbeat

1 August 2015

We have a deal! After months of tough negotiations, the six world powers (China, France, Germany, Russia, UK and the US) and Iran announced their agreement on 14 July that non-proliferation experts welcome as a breakthrough that defuses the smouldering crisis around Iran’s nuclear programme.

Weapons-grade uranium – now off-limits for Iran
Weapons-grade uranium – now off-limits for Iran

The agreement imposes new limits on parts of Iran’s nuclear programme that could be diverted to a weapons programme, such as capping the enrichment of uranium at 3.67 percent (at least 80 percent are needed for weaponisation), in exchange for a gradual lifting of the economic sanctions imposed on the country since 2012. The agreement also limits the amount of nuclear fuel (the potential basis for bomb fuel) that Iran is allowed to keep over the next 15 years.

The bottom line is that the technical and logistical hurdles for developing a nuclear weapon – should this be the object of Iran’s secret ambitions – have just gotten considerably higher. At the same time, the immediate risk of a nuclear contagion in the region seems stemmed. Saudia Arabia, one of few countries worldwide which has not signed the Comprehensive Nuclear-Test-Ban Treaty, has not made it a secret that it would quickly follow suit should Iran develop the bomb, escalating the bitter Sunni / Shia rivalry to a different dimension.

Israel remains staunchly opposed

Political reactions were mostly positive, with the notable exception of Israel and hard-liners in the US and Iran. Israel’s Prime Minister Benjamin Netanyahu, who had lobbied hard against the deal, is on record that the step provided Iran with hundreds of billions of dollars with which it can fuel its terror machine and its expansion and aggression throughout the Middle East and across the globe”.

Local analysts see immense opportunities

For the Iranian economy however, the agreement bodes well, as it will eventually reverse the strict oil embargo and measures meant to cut the country off from the global financial system put in place in 2012. By 2013, Iran’s economy had shrunken by 5%, while inflation soared at 50% to 70%.

Rouzbeh Pirouz, executive at the Teheran-based investment company Turquoise Partners: “This is a historic moment … a breakthrough opportunity for global investors to invest in one of the most exciting markets of the future.”

Analysts in the region share this sentiment. Nour Eldeen Al Hammoury, chief market strategist at ADS Securities in Abu Dhabi, said: “Of course, lifting the sanctions on Iran opens the door for opportunities all over the world, not only for middle east countries. Moreover, the deal between Iran and the West may ease fears of geopolitical tension in the region. Therefore, trade, business and financial opportunities are likely to be significant between Iran and the region.”

In addition, the deal brightens the prospect of Iran’s access to fresh credits: “Banks may be willing to lend to Iran again, once payment systems are restored and sanctions are lifted,” said Ludovic Subran, chief economist at Euler Hermes Group. An estimated $100 billion of Iranian funds in international banks will eventually be unfrozen.

Golden opportunities for the non-fossil energy sector

To preserve crude oil for exports, Iran is planning to increase its wind and nuclear power capacities as a way to meet the rising energy needs of its 80 million people. Only days after the 14 July agreement, and to the displeasure of Russia’s ROSATOM, the country’s main nuclear trading partner so far, Iran and China announced plans to construct two new power plants on Iran’s southern coast.

Iran has also set itself the ambitious goal of installing 5 gigawatts of renewable capacity by 2020, an emerging market as large as France’s. Umweltconsult, a renewable energy developer based in Berlin, has announced plans to install wind farms worth 300m euros in Iran starting next year.

Abadan_Petrochemical_Complex
in for big business: Abadan Petrochemical Complex, Iran

Oil markets nervous about prospects of Iranian oil flooding the markets

Oil markets have been reacting nervously to all ups and downs of the Iran nuclear negotiations. Iran has the world’s fourth largest depots of crude oil and 30 million of barrels of crude in storage and ready for sale, according to FACTS Global Energy, an industry consultancy.

And Iran has made no secret of its intentions. Oil minister Bijan Namdar Zanganeh announced an increase in exports by 500,000 barrels a day as soon as sanctions are lifted, then an additional 500,000 a day in the following six months. Iran will be able to increase its oil production from 2.9 million barrels a day to 4.2 million barrels a day by 2020 according to Sara Vakhshouri, a Washington-based energy analyst at SVB Energy International.

Hence oil markets already reacted nervously in April, when the agreement on the deal’s main parameters were announced in Lausanne, Switzerland. At the time, the European benchmark Brent oil price dipped below $55 to later recover.

Similarly, after the deal’s announcement on 14 July, Brent crude fell as much as 2 percent to hit $56.67 a barrel before falling to current levels of $52.21 a barrel.

David Ramin Jalilvand from the European Policy Centre in Brussels cautioned that effects would not be felt in the short-term: “It will take at least until early 2016 before the energy-related sanctions are lifted,” he said.

The lifting of sanctions, including on oil exports will occur only step-wise, in accordance with verification by the International Atomic Energy Agency (IAEA) that Iran is complying with the new limits. A first report by the IAEA is expected only on December 15, according to Director General Yukiya Amano. In addition, the deal still faces political hurdles, with hard-liners both in Washington and Iran criticising that the own country conceded too much.

Meanwhile, markets immune to North Koreas nuclear test threats

Amid the hype around the Iran deal, the announcement by a North Korean representative that the reclusive hermit country might conduct another nuclear test in October went largely unnoticed. The country’s deputy Permanent Representative at the United Nations Jang Il-hun said on Tuesday that North Korea may conduct another nuclear test in October to mark the 70th anniversary of the Worker’s Party of Korea.

“Working in a newsroom in Seoul, South Korea, it certainly does not feel like I’m living in a country that is in a state of war,” said CNBC reporter Chery Kang after the country’s last nuclear test in February 2013.

Seismogram from the 2009 (blue) and the stronger 2013 (red) North Korean nuclear tests
Seismograms from the 2009 (blue) and the stronger 2013 (red) North Korean nuclear tests

And when it comes to the stock markets, Korean stock have become “immune to North Korean tensions” writes Jasper Kim, founder of Seoul-based Asia-Pacific Global Research Group.

This immunisation process is clear from the reaction of Korea’s main indicator KOSPI to the three nuclear tests conducted by the North so far: while it lost 2 percent the day after the tests in 2006 and 2009, it took one week to recover after the first test and three after the second. The third nuclear test in 2013, while causing a 4.9 magnitude shockwave in the ground, failed to have any impact at all on the stock markets.