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The potential for a wider Middle East war has been lurking ever since Israel first attacked Iran more than a week ago. The risk may have increased after the US strike on Iran over the weekend. But markets continue to shrug off the threat of a wider conflagration. A key factor for the path ahead could be a direct function of how or if Iran responds.
Here’s a quick review of some of the key factors for monitoring Iran risk:
Crude oil: Iran has the potential to curtail if not shutter oil exports via the Strait of Hormuz in the Persian Gulf, one of the world’s major choke points for energy exports. In that scenario, oil prices would likely soar, dealing a severe shock to the global economy. “Security officials maintain that it would be difficult for Iran to fully close the Strait of Hormuz for an extended period,” said Helima Croft, a former CIA analyst who is now at RBC Capital Markets. “That said, multiple security experts contend that Iran has the ability to strike individual tankers and key ports with missiles and mines.” At the moment, oil prices in early trading on Monday pulled back from a 5-month high. Meanwhile, betting markets have dramatically cut the estimated chance that Iran will close the Strait of Hormuz, based on data from Polymarket.
Regime change: A key factor that could inflame tensions in the Middle East and lead to a protracted conflict is regime change in Tehran. On Sunday, President Trump raised the possibility of as senior officials in his administration warned the Iranian government against retaliation. Writing on social media, the President commented: “It’s not politically correct to use the term, ‘Regime Change,’ but if the current Iranian Regime is unable to MAKE IRAN GREAT AGAIN, why wouldn’t there be a Regime change??? MIGA!!!”
The Russia factor: A key factor for Middle East risk is whether Russia comes to Iran’s defense in some degree. Iran’s supreme leader has reportedly written to Russia’s Vladimir Putin and asked for help following the US missile strike. “Iran has massively supported Putin’s war against Ukraine with weapons and technology. On his trip to Moscow, Iran’s foreign minister, Abbas Araghchi, may now ask Moscow to return the favor,” Holger Schmieding, chief economist at Berenberg Bank, wrote in a note Monday. “However, Putin has probably little to offer beyond some words. He needs his weapons himself for his continued aggression against Ukraine.”
For the moment, a wary calm prevails, but it’s fair to say the situation is fraught. “There could be secondary and tertiary impacts” from the US attacks on Iran, the head of the International Monetary Fund said today. “Let’s say there is more turbulence that goes into hitting growth prospects in large economies – then you have a trigger impact of downward revisions in prospects for global growth.”
Bloomberg Economics analysts, including Ziad Daou,d wrote in a report:
“We’ll see how Tehran responds, but the attack likely puts the conflict on an escalatory path. For the global economy, an expanding conflict adds to the risk of higher oil prices and an upward impulse to inflation.”