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Plummeting oil prices will have unexpected consequences

WTI Crude 3 month chart 1/16/16

Now that sanctions have been lifted, Iran will flood the world oil market with new supply, This could easily drop spot oil prices to $25 a barrel or less. Woo-hoo, you say? Yes, this hugely helps consumers, as gas prices at the pump continue to drop. However, this will have serious repercussions in financial markets, something which will affect all of us, if obliquely. Middle East stock markets dropped sharply in response to the Iran news. Shale oil exploration is dead in the US and Canada, with thousands of jobs disappearing. Traditional drilling is getting slammed too. Rig counts are way down.

This also changes geopolitics. The Saudi implied threat that, if they want to they can cut production thus raising prices, no longer matters. Iran will simply produce more.

Institutional investors like pension funds, mutual funds, sovereign wealth funds, and municipalities are often heavily invested in oil and gas. If you’re lucky enough to have a pension, maybe your fund is invested in energy too. And falling prices mean less yield. These investments include bonds issued by independent oil companies who are now in danger of becoming insolvent. And of course wall Street has cheerfully bundled all this together into secutitized glop that was sliced, diced, and sold. So, determining who gets hurt by falling prices becomes very opaque indeed.

With sanctions lifted, Iran will now have access to some $100 billion in frozen funds and will be able to increase its oil revenue exponentially even as prices remain suppressed.

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