The Ultimate Decision Tree For War In Iran: BCA Sees 70% Odds Of 'Massive Oil Shock'

Authored by Matt Gertken via BCA Research,

The world saw the beginnings of a "major oil shock," but now it seems to be fading back into a minor oil shock, requiring an update to our analysis.

We give a 30% chance to the positive scenario and a 70% chance to a conflict that drags on and damages the global economy.

We show our thinking in this simple new "Iran War Decision Tree," which is meant for the very near term (Diagram 1).

We explain the tree in the following sections...

Trump's Outreach To Iran

President Trump was not supposed to launch a war with Iran ahead of a midterm election. The risk of an oil shock was obvious.

He launched the war because opportunity knocked: Iranian social instability erupted in December. If he waited until the regime suppressed the opposition, then the critical vulnerability would pass.

With combined internal and external pressure on the regime, the US would maximize the chances of achieving its objective: permanently changing Iran's behavior.

While Israel seeks regime change, the US only needs personnel rotation. The US would prefer regime change, of course, but seems aware that that could come at too high of an economic cost.

Hence Trump's stated aim is to disarm Iran so that it cannot threaten others – i.e. dismantle the nuclear and ballistic missile programs, hobble the navy, and prevent Iran from promoting terrorist groups around the region. These aims are largely met.

Down the road, if Iran lost its military option, it could theoretically be forced to open up its doors to trade and American influence.

Iran's Reason For Choosing War

Iran suppressed domestic opposition brutally and wagered that war with the US and Israel would cause the nation to come together in defense of its identity, while isolating dissidents as traitors during wartime.

Diplomats refused to offer significant concessions during the final round of negotiations. All they had to do was renounce a nuclear program that had already been heavily bombarded. But they chose to fight, apparently believing that fighting alone could save the regime. Keep that in mind.

Now Iran's Assembly of Experts has appointed Mojtaba Khamenei, the son of the deceased Supreme Leader Ali Khamenei, as the new supreme leader. Mojtaba has been the favorite since former President Ibrahim Raizi died in a helicopter "accident."

With Mojtaba, the regime is reasserting the existing dynasty and implying that it will continue to pursue nuclear, missile, and regional ambitions once the war is over.

Trump previously claimed that Mojtaba was "unacceptable" – it is hard for him to prove that he has lastingly achieved the US's goals if everyone knows that the regime's intentions remain intact.

Either Trump changes his mind and negotiates with Mojtaba, or the war removes Mojtaba and produces a more palatable leader (which is neither impossible nor guaranteed), or the war rages on.

Iran's Parting Shot

Now that President Trump seems to be declaring victory and offering to resume negotiations, Iran is likely to issue a parting shot to demonstrate its prowess at home and abroad.

Hence the "all clear" signal for investors, as opposed to traders, is not Trump's capitulation but Iran's.

Iran has an incentive to prolong the political and economic cost to the US, given its strategy of exacerbating US domestic divisions and deterring future US military aggression.

At the same time, Iran cannot intensify the war indefinitely since the US ultimately possesses enough firepower to destroy the regime. Once the world slips into recession, Trump has nothing to lose and can bomb Iran into the stone age.

So the most likely scenario is one in which Iran escalates the conflict temporarily (extending the blockage of Hormuz at least this week), and then just before the US re-escalates its campaign, Iran rejoins negotiations.

Even then, Iran will have an interest in continuing to harass the region periodically to retain leverage over Trump before the midterm, and encourage domestic opposition, though not to the point of provoking another full-scale assault.

As for 2027-28, the minimum that Trump can accept is total access to the nuclear program so that Iran never again pursues nuclear weapons.

To understand Iran's position, ask what is the minimum that Iran can accept? The Americans can stop attacking, but Iran knows that the US can betray them after the midterm.

The only somewhat reliable security guarantee from America would be a change in ruling party, since the Democrats are less interested in war with Iran.

Hence Iran will maintain military pressure before the midterm, while it still has leverage.

Investment Takeaways

We see a 70% chance of a lingering oil disruption and a 30% chance of a rapid diplomatic solution.

Iran will not rejoin talks without prolonging the economic cost of the war beyond Trump's comfort zone.

Investors should pare their exposure to oil, but not liquidate it entirely.

We would stay overweight cash relative to equities and bonds.

The "buy signal" will come when Iran, not Trump, agrees to cease attacks and negotiate. That could be this week or next.

Even if a ceasefire is agreed, bear in mind that Iran could stage surprise retaliation later in the year, closer to the midterm election.

The Iran conflict and regional ramifications will remain relevant this year and beyond.

Professional subscribers can read the full note: "Trump Blinks, Will Iran Twist The Knife?" here at our new Marketdesk.ai portal