US-Iran Conflict: Settling into its Messy Negotiations Scenario, But Escalation Risks Will Persist

A period of relative calm over the weekend reinforced BMI’s current base case of Messy Negotiations for the United States (U.S.)-Iran conflict, although the underlying factors that prompted it to increase the probability of escalation from 25% to 35% remain in place. After two weeks of U.S. bombing, Iranian retaliation against Gulf countries, and renewed disruption to shipping through the Strait of Hormuz, Washington and Tehran have entered a de facto ceasefire¹ since July 24. The White House has messaged that the U.S. has halted its bombing campaign for the time being, and Iran has communicated that it will pause retaliatory strikes so long as the halt in U.S. bombing holds.
BMI has long highlighted political, economic and operational factors that will constrain the U.S.’s appetite for a sustained re-escalation. The U.S. has attributed the pause to the effectiveness of its campaign in stopping Iranian disruption of shipping, but the agency suspects a more important factor is concern over both defensive and offensive weapons shortages. Moreover, claims that Iran's ability to disrupt shipping has been significantly degraded are difficult to assess given the low level of traffic through the Strait; recent shipping data suggests 29 vessels transited Hormuz between 24-26 July, many of them Iranian-linked.
One important signal to monitor in the coming days is whether greater clarity emerges on the future of Hormuz. For the agency to be more confident that events are moving through its ‘Messy Negotiations’ scenario and towards a new U.S.-Iran understanding, one of two outcomes would be needed: either a) the U.S. accepts some form of Iranian oversight over the southern Hormuz route, with or without a regional consortium, or b) Iran concedes a southern transit corridor that does not require its coordination. According to BMI, outcome (A) appears more likely.
The Strait remains Iran’s most important source of leverage over both the U.S. and its Gulf neighbours, and BMI suspects Tehran will seek some degree of control over shipping throughout any future nuclear negotiations. However, the regime will be reluctant to move too quickly, preferring to prolong its unilateral leverage over Hormuz to maximise concessions from Washington. That said, it is possible that Iran could accept a version of (B), at least initially, if it judges that lingering security risks would still deter use of the southern corridor and channel most traffic through routes it prefers.
From the U.S. perspective, reopening Hormuz by force would be costly. Iran can disrupt shipping relatively cheaply with drones, while sustaining military operations at the intensity seen over the past two weeks would continue to deplete U.S. stockpiles without necessarily bringing Washington closer to its preferred outcome. Against this backdrop, wider Gulf participation in a future Hormuz framework, facilitated by Oman, could offer Trump a face-saving compromise while still meeting Iran’s criteria for some degree of oversight.
That being said, the risk of a shift to an escalatory scenario remains higher than it was earlier in July. Washington’s recent re-deployment of personnel and equipment to the region gives President Trump the ability to escalate at short notice. If reports of degraded US air defences are accurate, even relatively limited Iranian strikes could result in US casualties, increasing pressure for an escalatory response. There is also an ongoing risk that either side misjudges the other’s red lines, triggering a broader escalation.

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¹A de facto ceasefire is an unofficial halt to fighting that happens in practice without a formal peace treaty or written agreement.

(Source: BMI, A Fitch Solutions Company)