The Effect of Oil Price Changes on Other Financial Markets in Iran

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In resource-based economies, oil is not just a commodity; it is the «compass of inflation expectations» and the «engine of liquidity». For Iran, oil price swings mean changes in the trade balance, the government budget and, ultimately, a reshuffling of investors' asset portfolios. When the oil price moves, a wave of changes starts in the currency market and reaches deep into the stock exchange's glass hall and the debt market.

1. The shock transmission mechanism: how does oil move the markets?
 

Oil affects Iran's financial markets through two main channels:

• Direct channel (foreign currency revenue): Inflow of export earnings and its effect on the dollar supply.
• Indirect channel (budget and liquidity): Conversion of oil dollars by the central bank and growth of the monetary base.

According to key research by(Farzanegan and Markwardt (2009, Iran's economy is highly vulnerable to oil shocks. The study's findings show that positive oil shocks (price increases) lead to higher government spending and demand pressure, which creates a boom in the short term but is inflationary in the medium term.
 

2. The stock market: the Tehran Stock Exchange in the shadow of black gold

The Tehran Stock Exchange (TSE) has an unbreakable link with the oil price. The reason is the heavy weight of petrochemical, refining and basic metals companies in the overall index.
 

Positive and negative effects on profitability:

• Direct correlation: As the oil price rises, global prices of petrochemical and refined products go up, which directly boosts the profitability of «Shepna», «Shetran» and the Persian Gulf holdings.
• Liquidity effect: Higher oil revenue raises total liquidity, and part of this idle money always flows into the capital market.
• Investment risk: Conversely, a fall in the oil price (like what happened in the mid-1390s in the Persian calendar) reduces foreign currency revenue, causing pessimism and capital outflow from the stock exchange to parallel markets (such as gold).
   

3. The currency market: reining in the rial with oil dollars

The relationship between the oil price and the exchange rate in Iran is usually described as «inverse».

• Under normal conditions: Higher oil price = stronger central bank FX reserves = greater ability to intervene in the market = stable or falling dollar rate.
• Under sanctions: According to analyses published in ScienceDirect, during periods of international restrictions, even when the oil price rises, its effect on the rial weakens because of disruptions in repatriating currency. Even so, inflation expectations still move with the oil price.

Table 1: How markets react to oil price shocks

4. The debt market and interest rates: the budget deficit challenge

When the oil price falls, Iran's government faces a «structural budget deficit». To cover this deficit, the government has two options, both of which affect the financial markets:
 

1. Issuing debt securities: A larger supply of bonds in the debt market, which pushes up the effective interest rate and puts pressure on the stock market.
2. Indirect borrowing: which leads to growth in the monetary base and ultimately inflation in the goods market.
   Studies show that stability in Iran's debt market depends heavily on the «National Development Fund» and its ability to absorb negative oil shocks.
    

5. Dutch disease: a threat to long-term stability

One of the topics specific to analyzing oil's effect on Iran is Dutch disease (Dutch Disease) . When the oil price stays high for a long time, the massive inflow of foreign currency artificially suppresses the dollar rate. This makes domestic production uncompetitive and imports cheap. As a result, the stock exchange's manufacturing sector weakens and markets grow only on the basis of «speculation on non-tradable assets» (such as land and real estate). This kind of growth makes financial stability extremely fragile in the long run.
 

6. Analysis of the situation under sanctions and in the post-COVID era

Recent data show that market sensitivity to the oil price has changed shape under sanctions. Today, «export volume» has become as important as the «global oil price». Instead of looking only at the Brent price, investors in Iran now watch secondary reports on how much oil Iran is selling, because this variable is the main determinant of the «currency saturation point» in the domestic market.
 

Summary and outlook

For Iran, the oil price is not just an economic variable; it is a «political-security signal» that sets the heartbeat of the financial markets. In the short term, a higher oil price is a blessing for the stock exchange and the government budget, but without proper liquidity management it can come at the cost of runaway inflation. Smart investors in Iran should always monitor the correlation between the oil price and petrochemical indices and use the oil price as a leading indicator (Leading Indicator) to forecast the next move in the exchange rate.