As the conflict between Israel and Iran continues to unfold, the geopolitical uncertainty has prompted wide-ranging assessments of how it might play out. Analysts at Capital Economics have outlined four plausible scenarios, each with markedly different implications for the Middle East, global energy markets and international financial systems.

“The key takeaway is that even in the event of escalation, the range of outcomes remains wide — from short-term military engagement to regime change or prolonged conflict,” the firm said in a note published on June 18. “We may not know the endgame for some time.”

Scenario one, their current working assumption, envisions the conflict de-escalating within weeks. Israeli officials have signalled this possibility, suggesting that once military objectives are achieved, hostilities may subside. In this case, Iran’s regime would remain in place but with a weakened military posture, while sanctions would continue. “Oil prices would return to pre-conflict levels — around $65 per barrel — and safe haven flows in financial markets would unwind,” Capital Economics noted.

Scenario two assumes a more intense military escalation. If Israel expands its operations and Iran retaliates — potentially targeting US forces or threatening to close the Strait of Hormuz — the economic fallout could be sharp but short-lived. “Oil prices could feasibly spike to $130–150 per barrel, equities would fall, and the dollar would strengthen,” the analysts said. “However, these moves would subsequently reverse if a peace deal is reached, possibly paving the way for a new nuclear agreement.”

Scenario three explores posits a regime change in Iran, triggered by intensified conflict and mounting domestic pressure. In its most optimistic form, reformist elements within Iran’s establishment could gain power and seek rapprochement with the West. “Such a shift could ultimately lead to the lifting of sanctions and a return of foreign investment,” the firm said, adding that this outcome would likely be positive for risk assets and energy prices could stabilise at lower levels.

However, Capital Economics also flagged less favourable permutations — from hesitant leadership transitions to disorderly change — that could still reduce Iran’s ability to sustain hostilities. “In any of these situations, we suspect Iran would seek to extricate itself from conflict with Israel or the US,” the analysts wrote.

Scenario four, the most disruptive, involves a protracted conflict with no diplomatic exit. The Iranian regime would suppress domestic dissent and continue hostilities, while regional security deteriorates. “This scenario might result in a long-lasting higher oil price in the range of $130–150 per barrel,” Capital Economics warned. “It could lift inflation in advanced economies by 2–2.5 percentage points by the end of 2025 and would be a major risk-off event in markets.”

In all scenarios, Capital Economics says that energy markets will bear the brunt of instability.

“The outcome of this conflict will shape regional dynamics and global market sentiment for months, if not years, to come,” they concluded.