Middle East tensions: attack on Iran gives rise to numerous scenarios

Over the weekend, the United States and Israel carried out a coordinated military attack against Iran. According to reports, the attacks targeted military infrastructure, command centers, missile systems, and strategic sites. As a result of these attacks, senior Iranian leaders are believed to have been killed, including Supreme Leader Ali Khamenei, creating significant political uncertainty in the Middle East.

Iran, for its part, responded with attacks on Israel and US military installations in the region, as well as unofficially closing the Strait of Hormuz, disrupting maritime traffic with warnings to ships and a sharp increase in insurance premiums for ships transiting the area. So far, no attacks on other key oil production infrastructure have been confirmed, significantly reducing the likelihood of disruption to energy markets in the short term. It should be noted that Iran produces 2-3% of the world's oil (around four million barrels per day) and that 20% of the world's oil and 25% of its natural gas transits through the Strait of Hormuz.

In addition to geopolitical risk and uncertainty, it is precisely the evolution of oil prices that is worrying the market. On Monday, the price of a barrel of oil rose 7% (and now exceeds $80 per barrel). The impact on the markets will depend on the duration of the conflict, the degree of disruption in global energy markets, and the management of the Strait of Hormuz. The interaction between these three variables will determine whether we are facing a temporary episode of volatility or whether it will evolve into a more complicated scenario.

What do we think?

The experience of similar episodes in the past leads us to believe that a prolonged blockade of the Strait of Hormuz is unlikely given the economic cost to Iran, which would lose a large part of its exports. However, the strait does not need to be officially closed to cause disruptions in shipping routes that would have an impact on the global macroeconomy.

In this regard, an energy supply shock would reignite inflation, as happened in the first few months after Russia's invasion of Ukraine, with a more pronounced impact on economies such as those in Europe and Asia, which are net energy importers. Higher energy prices have a direct impact on growth, as they reduce private consumption and slow investment, which translates into more restrictive financial conditions.

For now, the market reaction is typical when such geopolitical events occur: sharp falls in equity indices, a flight to safety in assets such as the dollar or gold, and a rise in the commodities most affected by the conflict, such as oil and gas. The behavior in the fixed income markets is also following the usual pattern, with more pronounced rises in interest rates at the short end of the curve due to the risk of higher inflation limiting the flexibility of central banks to cut interest rates and support growth.

Given that tensions continue and uncertainty is high, the most sensible approach is to work with a predefined roadmap for different scenarios.

• Base scenario (50%): Partial interference without systemic damage

Military operations focus on Iranian targets without devastating attacks on key energy infrastructure. Flows through the Strait of Hormuz are intermittently disrupted, causing an increase in energy inflation for a few months, which would not trigger a reaction from central banks or a drastic reduction in growth forecasts in Europe and Asia, as these are the areas most affected.

• Adverse scenario (30%): Damage to infrastructure and attacks on Gulf producer countries

Military attacks on facilities in Saudi Arabia, the United Arab Emirates, or Iran itself trigger a broader international reaction. The price of oil could exceed $100 per barrel and gas could reach between €60 and €80 per MWh, with a more persistent impact on inflation and sharp reductions in expected growth. We could expect a fiscal response from governments to cushion the impact on consumers ahead of a monetary policy that would have to choose between price stability and growth.

• Severe scenario (20%): Prolonged closure of the Strait of Hormuz and/or damage to liquefied natural gas facilities in Qatar

The scale of the conflict spreads to other countries with sustained attacks on ships or critical facilities, triggering a sustained increase in energy prices. In this scenario, the risk of technical recession is high, given that the inflationary spike would have second-round effects.

The final conclusion is a more fragile global scenario due to a regional crisis with global implications. We do not believe that we are facing a situation like that of the 1970s, which led to a severe recession, given that the economic situation is very different, but we do expect higher (albeit controlled) inflation. The climate will be one of constant vigilance over the coming weeks to see whether, from our baseline scenario, we are moving towards an alternative scenario in which the accumulation of frictions causes a drastic change in the macroeconomic outlook.

The region is at a strategic moment in which the key will not be the action taken in the coming hours, but rather the ability of the various international powers to prevent the conflict from spreading beyond its current perimeter.