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Egan-Jones Analyzes Potential Scenarios as Iran War Continues

As the war in Iran approaches its fifth month, Egan-Jones Ratings Co. has released a detailed analysis exploring possible ending scenarios. This critical examination looks not only at how the conflict might resolve but also what each outcome could mean for oil prices, interest rates, and overall portfolio risk for investors.

The analysis reveals that none of the initial objectives of the military campaign have been successfully accomplished. These objectives included regime change in Iran, ending uranium enrichment, dismantling Iran's ballistic missile capabilities, and reducing their financial support for regional proxy groups. Instead of progress, the situation appears to have worsened, with a loss of control over the Strait of Hormuz, increasing threats in the Bab el-Mandeb Strait, destruction of American military bases, and weakening of regional alliances.

In understanding the current military and economic context, Egan-Jones identifies two main constraints that have shaped their assessment. First, the Strategic Petroleum Reserve, which was approximately 415 million barrels when the conflict began, is now reported to have dwindled to 307.7 million barrels, the lowest level observed in over forty-three years. Alarmingly, a report from the Government Accountability Office indicates that more than a quarter of the remaining reserves cannot be utilized. Secondly, public sentiment regarding the conflict has shifted dramatically, with only 28% of Americans believing that the war is worth the ongoing sacrifices.

Egan-Jones outlines five potential exit scenarios for the ongoing war, providing perspectives for investors considering the potential impacts on various markets. The most likely scenario is a prolonged settlement, which would ease war-related risks and potentially boost energy market stability. The other scenarios include withdrawal prompted by political pressures and reaching a durable agreement, both of which are judged to have moderate potential effects. In contrast, an indiscriminate bombing campaign is viewed skeptically, while the prospect of a strategic nuclear exchange is considered extremely unlikely.

The financial markets have already started to reassess risk, with contract prices on the Kalshi event exchange reflecting a 63% probability of a Federal Reserve interest rate increase in 2026—a stark contrast to just 13% before the initiation of hostilities. The report underscores that the impetus behind inflation this year has been primarily driven by energy prices, making the overall economic landscape heavily reliant on conditions in this geographical region.

Additionally, Egan-Jones posits that the forward-basing military model, which effectively supported American military engagements throughout the latter half of the twentieth century, is currently being abandoned. This assertion is underscored by the fact that at least eleven American installations in the Middle East have already faced attacks this year alone.

The firm's conclusions serve as an essential framework for institutional investors who must navigate the complex intersections of military conflict, energy pricing, and credit risk in what has become an uncertain and evolving market landscape. As the situation continues to develop, staying informed about these potential scenarios will be critical for those looking to safeguard their investments.

About Egan-Jones Ratings

Founded in 1995, Egan-Jones Ratings Co. is a nationally recognized statistical rating organization (NRSRO) providing timely and accurate credit ratings and proxy services to investors.

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