As we approach the two-month mark of the open conflict between the United States and Iran, a new temporary status quo of “no open war, but no normalization either” is emerging as neither the Trump Administration nor the Iranian regime seem willing to openly shift their negotiating positions. What could have been a fairly imminent – e.g. in the month of April – but shallow agreement to reopen the Strait in return for sanctions relief and the initiation of new negotiations on restrictions on Iran’s nuclear program is now morphing into a somewhat longer process, where both sides seem to bet on pressures from dueling blockades and “non-kinetic breaches of the ceasefire” building faster on the other.
The precise duration of this impasse is harder to “guesstimate”, but for a number of reasons this inherently unstable equilibrium is unlikely to last more than perhaps a couple of weeks, and the threshold for a return to open warfare remains very high.
First, the higher-than-expected degree of flexibility and adaptability in global fossil fuel markets have to date smoothed the economic impact of what is now a nearly two months long near complete closure of the Strait of Hormuz. Inventory drawdowns, the lifting of sanctions on what may well have been a considerably larger than generally perceived sea-borne Russian/Iranian “shadow inventory”, ongoing fossil energy demand destruction in low-income Asian economies, rising U.S. exports, and market expectations of a fairly imminent reopening of the Strait (permitting aggressive inventory drawdowns) have to date mitigated the impact of the Strait closure.
Yet, physical inventories will be approaching their natural lower bound soon, after which only aggressive crude and refined product repricing and associated wider demand destruction in also advanced economies can rebalance markets without a resumption of Hormuz supply. The prospects of rising oil prices will soon therefore undermine the economic foundation of the current calm and negotiation hiatus.
Rising oil prices will clearly put pressure on Trump to cut a deal, but will also incentivize Iran’s main economic partner – China, deeply dependent on exports to Asian countries heavily exposed to demand destruction and lower economic growth – to put pressure on Tehran to engage credibly to reach a deal.
Secondly, the latest “silver bullet” Washington D.C. thinking that the U.S. blockade of Iranian maritime activities will soon cause Iran to capitulate on core negotiating positions, despite Tehran not doing so as a result of the air campaign, may take a little time to be dispelled by reality. Ironically, it seems likely that the new “truly maximum pressure campaign” against Iran deploying both U.S. economic sanctions and high sea interdictions directed against also Tehran’s China-linked maritime trade might have been a far better strategic gambit for Donald Trump back in February than starting the air campaign. It would have forced Iran to “fire the first shot” and retaliate kinetically against the Gulf, a decision that Tehran might not have been willing to take and invariably would have placed it in the diplomatically exposed position of the war monger.
This does not, however, mean that even an increasingly tight blockade against Iran initiated only during the current shaky ceasefire will compel a now more IRGC-dominated Iranian regime to capitulate in the near-term. It is far from obvious that Iran will run out of money, domestic crude oil storage capacity, and be forced to cap a material number of its oil wells, before the global and even U.S. economic situation deteriorates further.
Thirdly, despite repeated “plausible grounds for declaring the ceasefire over” by both sides, Pakistan facilitated diplomacy is continuing indirectly between the United States and Iran, as the reluctance to go back to all-out war is evident in both capitals. Both Iranian and U.S. forces have now seized ships and fired at those of the opponent, but both sides continue to broadly adhere to what is now a de facto open-ended ceasefire without a fixed expiration deadline.
Iranian Foreign Minister Abbas Araghchi has repeatedly visited Islamabad this weekend, as messages continue to be exchanged through mediators between Washington and Tehran. Donald Trump’s decision to ultimately not send a U.S. negotiating team to Islamabad this weekend seems rooted in the “bad optics” of looking more desperate with the U.S. side flying halfway around the world, and Iran’s team just a couple of hours to “talk on neutral Pakistani ground”, and the still unsettled Iranian position on core outstanding issues concerning both the Strait of Hormuz and the nuclear program.
Diplomacy between two sides sharing deep mutual distrust and having to endure the constant public attempts by both Donald Trump and IRGC-linked entities in Iran to shape to negotiations takes time, but ultimately outcomes remain bound by the unwillingness to risk a resumption of the shooting war.
There are likely two main items to be on the look for in the coming days – one diplomatic and one market-based. As Pakistani mediators continue to “earn their diplomatic spurs” and indirect engagement continues, a finessed version of a “shallow deal” on the Strait and ongoing nuclear (and possibly including other elements like ballistic missiles, drones and proxies) negotiations may come out of Islamabad at any moment. This would then plausibly see direct negotiations restart with the mutually shared aim of reaching a quick deal.
It is also plausible that economic and financial pressures – and their associated political impact – in the form of rising crude and refined product prices will be required first to force otherwise unpalatable political decisions to be taken not least in Washington and – via Beijing – in Tehran to forge a deal. This latter option would be the economically more costly solution to the current standoff, though neither option would see a return to the status quo ante in the Persian Gulf region, as risk premia would remain elevated on trade passing through a more volatile Strait of Hormuz.
In sum, while the path to negotiated solution to the current lull in the Iran conflict looks longer than previously anticipated, the regional arc still bends towards it in the coming up to two weeks.
Jacob
