A Clear Eyed View of the Iranian Nuclear Deal

Let’s try to cut through all the media rhetoric and understand why the deal with Iran was done in the first place.

Below are several charts which show the Dow Jones Industrial Index and its relationship with oil (Courtesy Stockcharts.com):

Ratio of $INDU/$WTIC

Note how the ratio exploded upwards in the second quarter of 2014.

$WTIC (oil price)

Note how the oil price collapsed at that point in time.

Dow Jones Industrial Index

Note how the Dow Jones Index had penetrated below its 200 day MA at that time. Here’s a closer look:

DJIA – 2 year view

Note the sharp rise following the fall in October.

Now look at the date that the oil price fell

Oil Price – 2 year view

 

Note the downside breakaway gap in November 2014. Remember the old saw “Buy the rumour sell the news”? The markets must have known in October about the impending fall in the oil price.

Now let’s look at a chart of the oil price’s most recent behaviour:

Oil Price – 3 month view

Note the downside gap that manifested on July 6^th – EIGHT DAYS BEFORE the Iranian nuclear deal was announced. Note also how, on the 14^th July, the day the deal was announced, the oil price bounced. (Buy the rumour, sell the news)

Finally, let’s have a look at the most recent behaviour of the Dow Jones Industrial Index.

DJIA – 3 month view

Note how the index rose strongly on Friday July 10^th and shot up on Monday July 13^th – the day BEFORE the deal was announced.

Interim Conclusions

• There is no doubt that there is a correlation between the prevailing oil price and investor perceptions of future economic activity
• The fact that the oil price fell a week BEFORE the markets jumped indicates that the oil industry was intimately involved behind the scenes during the Iranian negotiations.

 

Bloom Observations

Any naïve optimists out there, who believe that the world economy is on the mend,  should  have a close look at the next chart. It shows that container freight rates have been plummeting since early 2015.

Source: http://www.mauldineconomics.com/connecting-the-dots/sinking-ships-train-wrecks-and-empty-trucks-my-case-against-transportation

Quote from the Mauldin article:

“The Shanghai Containerized Freight Index—the cost of shipping a container from Shanghai to Rotterdam—fell to $243 per TEU (twenty foot equivalent unit), a new all-time low and below the cost of fuel, estimated to be $300 per TEU.

That’s right: For every container an Asia-to-Europe ship transports, it will lose $57. Ouch!”

China is the world’s largest user of containers, so this begs the question: Why have container rates fallen so sharply?

Could it be that China’s exports have been tanking?

Well, here is a chart of the Dow Jones Retail Index.

Point & Figure chart of Dow Jones US Retail Index

Note how it has been skyrocketing since early 2015. What seems to have happened is that consumers in the US have been benefiting from “desperation” pricing by China.

But the honeymoon might be drawing to a close. Have a close look at the chart of US retail sales below:

US Retail sales

Note how retail sales have shown negative growth in 14 of the last 43 months and how, since January, actual sales have shown negative growth in the first three months of the year, and AGAIN in July.

Question: Why would the authorities be worried about the oil price in general and Iran in particular?

Answer: Probably because  Quantitative Easing is no longer effective, low interest rates are no longer stimulating demand  and the only way to stimulate global trade is to get the oil price down.

Question: But why Iran? US exports of fracked oil have been booming.

Answer: Because shale oil occurs in relatively small pockets and these pockets have limited life expectancies, and ALSO because Iran has the fourth highest oil reserves on the planet.

Quote from Wikipedia: https://en.wikipedia.org/wiki/Oil_reserves_in_Iran

Proved oil reserves in Iran, according to its government, rank fourth largest in the world at approximately 150 billion barrels (24×10^⁹ m³) as of 2014, although it ranks third if Canadian reserves of unconventional oil are excluded.^[1] This is roughly 10% of the world's total proven petroleum reserves. At 2006 rates of production, Iran's oil reserves would last 98 years if no new oil was found.

Overall Conclusion

If you have been wondering why the West has been negotiating such a seemingly STUPID deal with an extremist Muslim nation that has been buying illicit Nuclear technology and avowing undying hatred for Israel and the US – even as the nuclear negotiations have been proceeding, then here is the reason:

It is IMPERATIVE to get the Iranian oil flowing onto the world markets in order to put downward pressure on the oil price – in order to prevent the Global Economy from entering the second down leg of the GFC.

Will it work?

It depends on whether Iran is genuinely wanting to participate in a peaceful future alongside other nations of the world, or whether this country is really being run by religious fundamentalists.  Personally, I’m not holding my breath.

******** 

Brian Bloom

Australia

www.beyondneanderthal.com