Iran war: Energy normalization drifts further away
As a graduate student in the summer of 2005, I was registered to study Persian at Tehran University, but my visa failed to materialize in time. I instead spent the summer working for an oil consultancy, where I was asked to produce in-depth biographies of key decision makers within Iran’s elite. I never imagined that research would become relevant again—until February 28, 2026.
Why Tehran’s demands keep the risk skewed
As I observe the early signs of a US-Iranian dialogue, my assessment is heavily informed by that work. Many of the names resurfacing today comprise both the assassinated as well as surviving leadership of the regime—figures largely drawn from the original veterans of the 1979 Revolution and the Iran-Iraq War. Regime survival instincts are central, and pragmatism tends to prevail during times of crisis.
At the same time, the history of the Islamic Republic’s negotiation tactics reveals consistent patterns, which are summarized here:
- First, the regime prefers to dictate the time frame, often extending negotiations beyond the counterparts’ expectations, in order to force a sense of ‘impatience’ to get a better deal.
- Second, the leadership has a track record of overstating its bargaining position.
- Third, conventional national interests—such as economic or environmental exigencies—factor little in their thinking and can be sacrificed for the sake of leverage.
Hence, our team’s relatively high odds (55%) that a cease-fire fails to succeed anytime soon. The more benign scenario (45%) rests on a potential arrangement led by the US halting fire and Iran permitting the resumption of energy transit. That said, we can easily imagine a dynamic where Tehran imposes demands that the US cannot tolerate, thereby increasing escalation (Figure 1).
Figure 1: Our current view
| Benign case (45%) Short war | Base case (55%) : 1979 redux | |
| Description | US cease‑fire initiative matures into informal understandings, enabling a resumption of normal energy transit | Regime retains sufficient drone capability to sustain energy disruption, prolonging the war for months to extract US concessions and reinforce its entrenchment |
| Energy disruption | Gradual normalization starting by late April | Incremental deterioration in energy supply over next 2-3 months |
| Macro impact | Modest stagflation hit, with residual risk premium | Global macro shock, negative for most risk assets, and worsening over time proportional to duration of conflict |
| End-April oil price | Oil: $80-90 | Oil: $120-150 |
| Bonds | Retrenchment in yields but not to pre-war; curve slightly flatter | Initial flattening but then progressively steeper curve as policy eases in response to growth damage |
| FX | USD normalization to pre-war | USD strengthening until Fed diverges from other DM central banks |
| Equities | Favour cyclicals, especially US industrials, materials, financials, and consumer discretionary | Favour energy, chemicals, defensives (health care, utilities, staples) |
Source: State Street Investment Management, as of March 24, 2026.
The regime sees no urgency to move
The US cease-fire proposal largely resembled pre-war demands, except for an improved promise of full sanctions relief. The initial Iranian response widened the gap by including new conditions, such as recognizing Iranian control of the Hormuz Strait and halting the Israeli war against Hezbollah. Continued paralysis of shipping and relatively steady missile/drone fire give the regime high confidence that it can sustain the status quo. Figure 2 shows Iranian attacks over the past two weeks with the 5-day moving average (5DMA) emphasizing a steady level. It makes possible a scenario whereby active attacks decline, but shipping remains closed.
Week 4 assessment
Positive (sooner end to war / better for risk assets) | Negative (prolonged war and worse for risk assets) |
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Why energy might not return to previous levels
The macro story has largely already been told. To reiterate, what matters is the duration of the conflict and related energy outage. We have yet to see a material supply shock as it has been largely just a price shock. Even that has been relatively mild thus far and remains far below the shock in 2022 but would easily eclipse it if the Hormuz straits remain shut even by mid-May. For key raw commodities, below is a quick table comparing today’s prices to peak 2022, showing a milder impact across the board (Figure 3).
Figure 3: Current commodity prices as a fraction of peak 2022 prices
Commodity | Fraction of peak 2022 price |
Brent | 0.7 |
German power prices | 0.11 |
EU wheat | 0.4 |
US gas Henry Hub | 0.3 |
Urea | 0.7 |
EU steel | 0.5 |
Source: State Street Investment Management, as of March 24, 2026.
For refined products, the comparison is consistently at the higher end of the spectrum, in the 0.7-0.8 range, close to the 2022 experience. Some type of fuels, such as jet fuel have already hit the 2022 peak, which is why Figure 4 shows a strong jump in “prices at the pump”. And this is all just within the benign base case of a relatively short war, which means a protracted war still carries large downside potential.
Long term, even with a short war, the energy complex will not be returning to normal:
- First, there will be a permanent risk premium on Gulf energy as Iran risk will not go to zero.
- Second, higher inventory and redundancy costs globally.
- Third, renewed tailwinds for oil/gas alternatives, ranging from nuclear, alternatives and even preserving local coal production.
This is basically a mini energy transition shock regardless of outcome, which is a drag on the global supply side of the economy.
When oil peaks, bonds react
Week four was calmer relative to previous weeks, with most headline volatility indices lower than at close of week three. We continue to expect the sharpest market reaction to occur in bond markets should the war appear likely to wind down.
Yields fell peak to trough by roughly 45 bps in 2022, 35 bps in 2003, and 20 bps in 1991, all within about a month of the oil price peak (Figure 5). Applied to the current episode, this historical pattern would imply yields falling by roughly 20–45 bps in the days following a peak in oil prices.
Both the beginnings and endings of wars are often marked by surprises. While current momentum points toward de escalation, the outlook for a normalization of energy markets looks little improved from before.
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