Iran: Limited U.S. Attack?
· Iran authorities appear reluctant to meet the Trump administration’s demand to stop nuclear fuel production for potential weapons. This increases the odds of a limited attack by the U.S. on Iran to 30-40% (Figure 1), which could occur as soon as this weekend. The most likely Iran counterattack would once again be designed to allow a path towards de-escalation and then better negotiations. However, modest odds exist of Iran trying to close the Strait of Hormuz, which could spike oil prices up to USD100.
Figure 1: Iran Scenarios
Source: Continuum Economics
President Trump has given Iran 10 day to do a deal or face an attack from the U.S. naval strike group. Key points to note.
· Odds of limited attack have increased. The U.S. armada off Iran is designed as a show of force, but Iran has not caved in during the negotiations. Iran authorities appear reluctant to meet the Trump administration’s demand to stop nuclear fuel production for potential weapons. This increases the odds of a limited attack by the U.S. on Iran to 30-40% (Figure 1), which could occur as soon as this weekend. Negotiators are trying to get the two sides to agree on a face saving compromise that Iran could still undertake nuclear research for medical purposes, but it is unclear whether a breakthrough will occur. (Note: Regional actors, including Turkiye and Qatar, remain concerned by the escalating tensions and continue to advocate for a formal negotiation process). The other restraining factor on Trump is that an attack could cause a jump in oil prices, which causes U.S. voter backlash given that cost of living is the number one concern before the November mid-term elections.
· Iran counterattack. Iran authorities would likely retaliate any U.S. limited attack. The most likely scenario is a response calibratedto allow a path towards de-escalation and then better negotiations. (Note: This was the case last year with the attack on the U.S. base in Qatar). After a limited attack, the U.S. negotiating position would not be as strong, as the next U.S. option of a full scale attack is high risk and could see a substantive jump in oil prices. In this scenario Iran would be highly likely to try to close the Strait of Hormuz, which could spike oil prices to USD100 and mean that the risk of Trump losing the mid-term elections by a bigger margin. This would be enough also to cause a correction in the U.S. equity market, which Trump is sensitive too. Even in the scenario of a limited attack by the U.S., a modest risk exists that the Iran counterattack could be an attempt to close the Strait of Hormuz to weaken the U.S. negotiating position.