Iran in dire straits

I presented my scenario analysis of the ongoing conflict between the US, Israel and Iran in my post on 17 March 2026 (see “The war and beyond”). After 40 days of intense fighting, the US announced a two-week conditional ceasefire on 8 April 2026 to allow peace talks mediated by Pakistan. Delegations from the US and Iran met in Islamabad on 11-12 April 2026. These were the first direct talks between the two countries since 1979. The negotiations ended without any agreement, but they have opened the door for further discussions.

The current state of affairs

In my 17 March post, I listed stalemate as one of the probable outcomes. As of this morning, that outcome looks most likely.

The US has positioned naval forces in the Strait of Hormuz against Iranian forces, but any major escalation now appears unlikely. While the Islamabad talks have broken the ice, a lasting peace may still take a long time. This situation confirms a stalemate, with the conflict continuing only at low intensity.

·         Most GCC members have shown signs of breaking ranks with the US. Qatar, Bahrain and Oman have indicated this tactically. Saudi Arabia has invoked its treaty with Pakistan, and Pakistani forces have been sent to Riyadh. This weakens the US position in West Asia.

·         Israel has opened direct dialogue with Lebanon’s political establishment. An agreement could turn Hezbollah into a non-state actor and cause Iran to lose legitimacy in Lebanese affairs.

·         Some European nations have refused to take any direct role in keeping traffic moving through the Strait of Hormuz. Spain and the UK have taken a particularly strong stand against the US, raising the possibility of a US exit from NATO.

·         Iran has tried to use its geographical control over the Strait of Hormuz — a critical route for global trade and energy — to its advantage. It has held ships and proposed toll charges. However, Iran shares the strait with Oman. The UN Convention on the Law of the Sea (UNCLOS) guarantees free passage for all ships. Oman is a signatory to UNCLOS; Iran has not yet ratified it. Oman therefore cannot legally join Iran in restricting access. A long embargo would isolate Iran further from the global economy. Trade always finds its own path. Iran’s energy production can be replaced quickly by higher output from Saudi Arabia, Venezuela, Russia, the US and others. In the absence of any US attack, Iran has no reason to strike its GCC neighbours or disrupt their energy exports.  Though Iran may not have technically lost the war, it has been significantly weakened both economically and strategically. Failure to reach an agreement in the next couple of months could isolate it even more as the global economy suffers from higher energy costs.

·         A low-intensity conflict may continue for many years; however a major attack by Iran or Israel to declare the ceasefire over cannot be ruled out completely.

·         Energy prices may remain elevated for a long time, but supplies should normalize within a few months.

·         Indian stock markets may stabilize after a few days of heightened volatility. Fourth-quarter results and FY27 guidance will decide the market’s future direction. In my view, we may see a narrow, range-bound market for the next six months.