The situation in Iran remains volatile. The two-week ceasefire, intended to create breathing room for diplomacy, is already under strain. Many details of the agreement remain unclear or even disputed.
What is known so far suggests that it is more of a framework for negotiations than a fully defined agreement. The situation remains fragile and improvised, and far from a true resolution. Therefore, the set of potential outcomes remains wide, with probabilities quite evenly distributed.
Will the ceasefire hold?
The ceasefire looks fragile. Israel insists Lebanon is not covered, even though the deal’s broker, Pakistan’s prime minister, Shehbaz Sharif, says otherwise. The arrangement also bears the hallmarks of expediency. The bottom line is that Donald Trump needed an offramp, judging by his remarks. He has described Iran’s ten-point framework as “a workable basis” for talks, though much of it reads as maximalist and difficult to square with American interests. Key terms remain vague: what, for instance, counts as “free” passage? Tehran does not interpret this as toll-free, and Washington has offered little clarification. Unsurprisingly, only a trickle of ships has passed through the Strait of Hormuz over the past couple of days. Even so, the ceasefire is likely to endure – even if only partially respected – because neither side has much appetite for further escalation, in our view.
Why do we think that some form of deal is more likely than not?
Both parties’ demands are maximalist, and, as such, irreconcilable. Still, both parties have an interest to see the oil go through the Strait of Hormuz. For Trump, this means a lower oil price, which he needs if he wants to retain any chance of keeping at least one of the houses in the midterms. For Iran, the ability to levy transit fees would provide a quick source of revenue to rebuild its battered economy. So, in the end, pragmatism may trump principle. It is entirely possible, however, that no deal is reached before years and that the US administration shifts its focus on something else. Ships will go through the Strait of Hormuz, but it is Iran that would largely dictate the terms of passage. We have attached a 30% probability to this scenario.
What sort of deal might emerge?
Probably an unsatisfactory one. If Iran were to secure de facto control over the Strait, it would mark a strategic setback for America, which previously guaranteed freedom of navigation. Washington might tolerate such an outcome temporarily – perhaps to buy time until after the midterms – before seeking to reverse it later. Another option would involve an international naval presence to safeguard shipping, in exchange for sanctions relief. That would still hand Tehran a net gain: leverage over the Strait in return for economic concessions. American demands for limits on Iran’s nuclear and missile programmes seem unlikely to be met, especially under a hard-line leadership.
When will traffic through the Strait return to normal?
Not soon – if ever. The immediate priority will be clearing fully laden tankers from the Gulf before empty vessels return. But shipping capacity is already stretched, with many vessels diverted elsewhere. Even after the ceasefire in Yemen between the US and the Houthis, Red Sea traffic remains far below pre-crisis levels. Insurance costs for transiting Hormuz will stay high until risks become clearer. Unlike the Red Sea, however, there are few viable alternative routes, limiting the scope for rerouting. Over time, Gulf states may invest more in pipelines to reduce dependence on maritime routes. For now, higher oil prices look entrenched.
Who stands to win from the new situation?
China stands out. The crisis is likely to accelerate electrification and the broader energy transition, boosting demand for electric vehicles, batteries, solar panels and other technologies in which China dominates. Geopolitics may also shift in its favour. If NATO cohesion weakens, Europe may reassess its strategic autonomy – and, by extension, its relationship with China. Meanwhile, America’s allies, especially in the Gulf and Asia, may begin to question the reliability of American security guarantees.
Will the world economy return to its pre-war state?
No. Oil prices are likely to settle in the $80–90 range, reflecting tighter supply. That implies higher inflation and weaker growth. In advanced economies, inflation could end the year 0.2-0.9 percentage points above pre-war expectations, with growth 0.2-0.6 points lower. Central banks may keep policy tighter for longer, dampening credit creation. Supply disruptions, as seen during the pandemic, may also prove persistent. Repairing damaged energy infrastructure and restoring production could take months. In emerging markets (EM), the impact on growth should be somewhat larger. Many EM governments limit the pass-through of oil prices through energy subsidies, implying less inflationary impact but more fiscal burden.
By Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management
