What are the odds of an escalation in the Middle East in the next 6-9 months?

The next 6 to 9 months are anticipated to feature significant escalation in the Middle East, with analysts at Alpine Macro suggesting a 60% likelihood of such developments.

Tensions between Israel and Iran have ramped up significantly after Iran’s missile strikes on Israeli territory on October 1, 2024. This incident is considered a dangerous escalation, as Iran claims these attacks were retaliation for the assassination of Hamas leader Ismail Haniyeh and Israel’s proactive measures against Hezbollah, including the death of its leader, Hassan Nasrallah.

These missile strikes from Iran represent a shift towards a more aggressive stance, going beyond standard deterrence. Observers note that Iran’s actions may be a reflection of its increasingly dire domestic situation, with the regime appearing to turn to external military engagements to reinforce its power internally.

Israel, meanwhile, views burgeoning threats from Hezbollah, Hamas, and Iranian missile attacks as significant and existential, creating a scenario where de-escalation is nearly impossible in a zero-sum conflict.

Alpine Macro outlines potential forms of escalation: one scenario indicates a conflict between Israel and Iranian proxies in Lebanon that could extend to Syria and Iraq. This situation is already partially unfolding, though it has yet to become sustained. A disconcerting second scenario predicts a direct and prolonged conflict between Israel and Iran, which would have dire consequences for the entire Persian Gulf region and could lead to substantial global economic implications, especially in the oil sector.

A key concern involves the possibility of Israel conducting retaliatory strikes on Iranian nuclear facilities or pivotal assets, which could ignite a broader regional conflict and potentially involve the United States. In a worst-case scenario, Iran could close the Strait of Hormuz, jeopardizing vital oil supplies and generating a global energy crisis.

While the likelihood of escalation appears high, there remains a 30% chance that conflict remains limited to Gaza without extending regionally. Additionally, a slim 10% possibility exists for a lasting truce, but this is deemed less plausible given the entrenched hostilities and intricate regional dynamics.

U.S. pressure on Israel could play a role in shaping its military response, potentially constraining the scale of Israeli actions, such as restricting strikes solely to Iranian airbases to avoid triggering a full-scale war.

Two unpredictable factors add further complexity to the region’s future. First, Iran may expedite its nuclear program, which could lead to it declaring itself a nuclear power, possibly provoking a preemptive military response from Israel or the U.S., with uncertain ramifications. Second, upcoming U.S. elections might shift regional dynamics; if Donald Trump were to win, Iran may escalate tensions prior to the implementation of his more hawkish policies. Conversely, a victory for Vice President Kamala Harris could prompt Israel to act preemptively, fearing that her administration would seek restraint and ceasefires.

The market impact of these geopolitical tensions is already evident, with oil prices increasing by 10% since Iran’s missile strikes in October. Should the conflict between Israel and Iran escalate further, oil prices could see additional hikes, and an outbreak of war disrupting oil shipments from the Persian Gulf would likely lead to significant and lasting consequences for global markets.

In light of these risks, analysts at Alpine Macro recommend that investors consider acquiring oil-related assets located outside the Middle East, as these could benefit from rising prices while remaining shielded from the immediate conflict.