Has there been any weaker asset than oil over the last several months? While the S&P 500, and its tracking exchange traded fund, SPY, is up over nearly 20% since the summer lows of last year, and market leaders such as Apple (AAPL) are up over 20% this year alone, oil and most major commodities have sold off hard since early March.
Indeed, most cyclical sectors, such as energy, the financials, and the industrials, have sold off around 20%, energy prices have fallen over 30% over the last four months. Market leaders in the energy and oil service sector, such as Exxon-Mobil (XOM), Halliburton (HAL), and Schlumberger (SLB), have been very weak as well.
With the dollar continuing to strengthen and demand in Europe and most major emerging markets, such as China and Brazil weak, and with oil production in countries such as Libya and Iraq now having risen significantly in the last six months, oil prices have faced a perfect storm of negative news.
This is why I question the nearly 12% rally energy prices have had off of the heavily traded commodities lows in the high 70s this past week. While, certainly, the negative factors affecting oil prices have been known for some time, I think it is likely that the direct and indirect results of Iran's cooperation with the international community will continue to significantly minimize the risk premium oil prices usually carry.
Iran has faced significant pressure from the U.S. and EU for some time. While Obama imposed significant new and harsher sanctions on this troubled nation when he entered office, China is now actively cooperating with the EU and U.S. for the first time. China has always been the largest buyer of Iranian crude, and China's likely increased cooperation with the international community is likely tied to increasing worries over slowing growth in Europe and concerns over inflation.
Still, while China's cooperation with the EU and U.S. efforts sanction Iran minimized the risk of retaliatory actions by Iran, such as when this troubled nation threatened to shut down the Strait of Hormuz last year, it is likely Iran's continued cooperation with the international community will also stabilize the Middle East in other ways as well.
Iran has been the biggest financier of Hizbullah, Hamas, and terrorist groups throughout the Middle East for some time. It was also well-known Iran was a huge supporter of anti-American insurgents during the Iraq war as well. Iran's cooperation with the international community should force the country to limit its financial support for a number of violent groups throughout the Middle East that rely on Iran for funding and support. Just six years ago Hizbullah initiated a cross-border raid sparking the Israel-Lebanon War of 2006, and Hamas has been consistently undermining peace talks between Israel and Fatah with rockets and other attacks. While Iran has been primarily a financial supporter of these violent organizations, Iranian leaders also could likely put significant pressure on leaders of these groups as well.
To conclude, while Iranian cooperation with the international community has been known about for some time, it is likely the true effect of Iran refusing to support and finance many powerful and violent organizations throughout the Middle East will likely be seen longer term. With Syria now isolated, a moderate winning the Egyptian election, and Iran forced to cooperate with the EU and U.S., the dollar will likely continue to rise as economic data in Europe and most emerging markets continue to deteriorate. With the economic data continuing to deteriorate in most emerging markets and leading industrials and financials such as GE, Caterpillar (CAT) and Citigroup (C) reporting poor earnings in the emerging markets, oil prices face significant pressure near-term.