TheMarketForIdeas

The ceasefire between the US and Iran was greeted with an optimism that I consider premature. We are not witnessing a moment of rupture, but a new phase of the same negotiation process that has been underway since it became clear that the regime in Tehran would not collapse under US military pressure and that, perhaps paradoxically, it has emerged from the confrontation more internally strengthened than before. Categorical statements about the refusal of any negotiation or the imminence of devastating strikes against civilian infrastructure have been part of the communication game of both sides. The reality on the ground is different and much more complicated.

The context of this new phase is marked by an American miscalculation that few explicitly acknowledge. The Trump Administration has come into conflict with an optimism encouraged in part by the success of the intervention in Venezuela, where combined pressure – military, economic and diplomatic – has produced tangible results in a relatively short period of time. It was hoped that a similar pattern could work in Iran: targeted military strikes, sanctions, and support for third parties capable of accelerating internal destabilization. In practice, this plan mainly involved mobilizing Kurdish forces in the border area and the internal opposition to the regime. However, the Iranian reality has proven that the Venezuelan model does not translate directly into a profoundly different context.

The regime in Tehran did not collapse, and the consequences of this failed scenario are structural and lasting. First, external pressure produced a classic nationalist rallying effect around the government, mobilizing segments of the population that were previously not supporters of the regime. Second, the association of the internal opposition with American and Israeli interventionism delegitimized it in the eyes of a public already sensitive to the memory of foreign interventions in the country’s history. Thirdly, and perhaps most importantly for the prospects of negotiations, the conflict has strengthened the Revolutionary Guards vis-à-vis the civilian government and clerical authorities. The IRGC has gained increased operational autonomy and informal authority in an already decentralized power structure. The practical effect is that not only has regime change become more difficult to achieve, but negotiating with it has also become more complicated: contradictory statements between members of the IRGC and the civilian government are visible even on social media, and the civilian authorities, who are the Americans’ counterparts in Islamabad, can no longer guarantee that negotiated positions will be respected by those who effectively control the military and security capabilities. The basis of the current situation is simple and implacable: neither side has been sufficiently hurt or cornered to accept what the other needs minimally to sign an agreement. Washington demands the complete dismantling of Iran’s uranium enrichment program. Any smaller concession would be perceived domestically as capitulation, especially as the loss of American life has raised the political stakes and Republican opposition to any compromise with Iran is structural, rooted in decades of hostile rhetoric. Tehran, on the other hand, no longer treats its stockpile of highly enriched uranium as a bargaining chip. Having seen how international safeguards work in other contexts, the potential nuclear arsenal has become the regime’s only realistic insurance against a future existential attack. Giving it up, under the current circumstances, seems more dangerous than absorbing further blows.

Hormuz: the last lever and the new source of income

The key to the whole equation is not the nuclear program itself, but the Strait of Hormuz. The two sides have diametrically opposed motivations regarding this maritime artery. For Washington, any closure of Hormuz represents an intolerably costly crisis that must be resolved before serious negotiations can begin. Approximately 20% of global oil trade and a significant part of liquefied natural gas exports, as well as chemical fertilizers for global agriculture, transit this strait. A prolonged disruption generates a supply and then a price shock on the global energy market with immediate political effects in the US, precisely in the context in which the Trump Administration is sensitive to any negative evolution in the cost of living for the average American in the period before the US midterm elections.

For Tehran, the situation is the opposite. The strait has become the last significant source of strategic leverage for a regime whose conventional military capacity has been seriously degraded. Moreover, its partial control over the transit has begun to function as an alternative source of revenue and as a tool for regional ascendancy, at a time when the Iranian economy is suffering under sanctions and after the destruction of conventional export capacities. Giving up this leverage without substantial guarantees would mean entering negotiations from a position of weakness, which no regime seeking survival will do voluntarily.

Consequently, Hormuz will continue to alternate between partially open and completely closed in the coming months, regardless of the good faith declarations of both sides. Each episode of closure or security incident will produce violent oscillations in energy markets, each reopening will generate ephemeral optimism. Markets should calibrate expectations not according to declarations, but according to the incentive structure that has not changed.

The American political calendar as a strategic vulnerability

Tehran has demonstrated over the decades an ability to read American domestic politics and use it to its own advantage. The current moment is not exceptional. The period leading up to the US midterm elections in November represents a window of maximum opportunity for Iran, and the regime is aware of this. President Trump fears not only the loss of congressional control by the Republican Party but also the more insidious scenario of the replacement of pro-MAGA candidates with anti-Trump Republicans in the primaries, which would erode his control of his own party well before 2028. A prolonged and costly conflict, with visible human and economic tolls, is exactly the kind of pressure that can affect the midterm election results. The Iranians have every reason to keep tensions high enough to be painful, but low enough not to provoke an American escalation that would exceed their capacity to absorb. This fine-tuning of the intensity of the conflict is the hallmark of Iranian strategy over the past three decades, including through the use of proxy forces such as Hezbollah and the Houthi rebels.

Resumption of LNG flow will be the last priority

Beyond the political-military dynamics, there is an economic dimension to this conflict that directly affects European energy markets and that deserves separate analysis. Hopes for a rapid resumption of liquefied natural gas (LNG) flows from the Gulf are, in my opinion, unfounded, and not only for reasons of transit safety through Hormuz.

Firstly, the Qatari operators of the LNG terminals must be convinced of the physical security of the facilities before any discussion of resuming exports makes sense. LNG terminals are extremely fragile infrastructure: an apparently minor incident at Freeport LNG in the US in June 2022, officially caused by a valve defect, put the facility out of service for several months. Demonstration strikes, intended to stake out negotiating positions, can produce unintended catastrophes with long-term consequences in the context of such facilities.

Secondly, even if the political will were to exist for a fragile opening of the Strait of Hormuz, shipowners themselves have strong reasons to refuse. Placing a ship in an area with a documented risk of active conflict can mean the cancellation of maritime insurance, which discourages trade flow. The Houthi precedent is relevant: despite the US-organized military escorts in the Red Sea, many shipowners have chosen the longer and more expensive African route, preferring the certainty of the additional cost to the uncertainty of the risk of attack. LNG carriers, which require additional safety space for technical reasons, would be among the last in any escort convoys, because fewer ships fit under the anti-missile and anti-drone umbrella of escort ships (assuming such a force were mobilized) compared to oil tankers and ships carrying products destined for Gulf countries. There is another angle here – natural gas markets are highly regionalized. The US is reeling from high oil prices but natural gas prices have not increased by a lot. It is others who are suffering from the growth in prices, including erstwhile allies in Europe and China, the former of which is ensuring record profits for US companies. So the US has limited interest in alleviating the pain the natural gas markets, as opposed to oil.

The grey rhinoceros and Europe’s lesson

The current crisis is not a Black Swan, an unpredictable and unanticipated event. It is a Grey Rhinoceros: a major impact risk, predicted by experts for years, but systematically neglected for short-term political and economic reasons. The closure of Hormuz was a scenario included in all serious energy risk analyses. However, Europe has chosen, over a long period, to dramatically reduce the share of its energy needs covered by long-term contracts.

The data is eloquent in terms of European vulnerability: from a level of coverage by long-term contracts of around 220% of its LNG needs in 2014, Europe had reached around 40% in 2022, exposing itself massively to the spot market just when the energy shock in Ukraine showed how dangerous this bet is. The reaction came, but late: companies such as TotalEnergies, Shell and ENI signed LNG supply contracts lasting almost three decades in October 2023, for deliveries starting in 2026. They only signed with Qatar. The irony is obvious: Europe is diversifying its supplier to reduce dependence on Russia, and now it is managing its growing dependence on the US, but it is doing so again with contracts focused on a region that is just demonstrating how volatile it can be. The current crisis will predictably accelerate two categories of infrastructure projects. The first is pipeline interconnection that completely avoids the Strait of Hormuz and, partially, the Red Sea. This category includes the Iraq-Europe Development Road, co-financed by Turkey and Qatar with Emirati participation, whose prospects have always been linked to maintaining energy prices high enough to justify the investment. The second category is represented by land pipelines in the Caucasus and Central Asia, where the current pressure will accelerate negotiations that have been dragging on for political reasons.

What’s next for energy markets

TTF (title transfer facility) prices will continue to be volatile, with spikes and spikes as supply concerns alternate with periods of relative calm. Europe remains the hardest hit by the twin shocks of the Red Sea crisis and the Hormuz disruption, with the highest exposure and the most limited short-term flexibility. Buyers who already have long-term, firmly negotiated contracts with non-Qatari suppliers are in a much more comfortable position than the noise in the spot market suggests. Visible market prices reflect the vulnerable supply margin, not the overall contract situation.

The US, along with Norway, Qatar and Azerbaijan, are the main structural beneficiaries of the European energy transition away from Russian dependence, even if in the short-term US LNG export capacities have physical limits that cannot be overcome quickly by political decisions. Liquefaction infrastructure and LNG export ports are being built in years, not weeks, which limits the speed at which the US market can satisfy additional European demand.

Cautious pessimism

I am wary of any scenario of a quick resolution of the US-Iran conflict. Not out of catastrophism, but out of the belief that the incentive structure has not undergone fundamental changes. Both sides need more pain or a greater degree of external coercion to accept compromises that they consider, for now, unacceptable from the perspective of political or physical survival.

At the same time, this conflict is increasing the dependence of the Gulf states on the US security umbrella. The US-UAE currency swap agreement and the UAE’s exit from OPEC are a visible manifestation of this security calculation and are the first in the region to be part of what US Treasury Secretary Scott Bessent calls a new financial-security architecture. Second, Russia is a winner from higher energy prices and in the reversal of polarity with Iran, which until recently supplied munitions, drones and other support for Russia’s war in Ukraine in exchange for significant technology transfers and other economic concessions. In the short and medium term, Russia’s North-South International Transport Corridor project between Russia, Central Asia and India has been disrupted. The land route (especially new rail projects) through Azerbaijan has become vital, hence the recent resolution of the conflict between the two countries over the downing of the Azerbaijani civil airline in 2025. Azerbaijan’s geopolitical hedging after recently signing the TRIPP corridor agreement in Washington is evident. China has proven resilient to the shock of the disruption of access to Gulf oil and gas. Its impressive strategic reserves and diversification of supply have given it this moment of respite, but it will feel increasing pressure in the medium term. Also, the expansion of new American agreements to re-anchor the petrodollar system on the Emirates model risks derailing the project of de-dollarizing China’s trade with third parties and using the renminbi.

What we can predict with more certainty is that: negotiations will continue with public ruptures and resumptions that will create disorientation in the markets; Hormuz will operate intermittently; LNG flows from the Gulf will remain disrupted for at least the next few months; and that Europe, once again, will pay the highest price for a decade of strategic indiscretion. The lesson is not that energy globalization has failed, but that it cannot function without resilient infrastructure, security of supply, and diversification that is not sacrificed in favour of short-term financial optimization or unilateral environmental programs. The closure of Hormuz was predictable. Our resilience to its consequences should not have been an option.

Photo source: PxHere.com.