Schrodinger’s Strait

Iran fires while negotiating. That is leverage, not irrationality.

On 7 May I argued that Iran’s strategic victory condition – meaning Iran’s ability to negotiate without capitulating, rather than any decisive military victory – was as close to being met as it had been since the JCPOA collapsed. In the early hours of 8 May, Iranian missiles, drones, and small boats and three American destroyers transiting the Strait were engaged in a brief firefight.

That looks like a contradiction, but it is not.

A regime that retains leverage demonstrates it can still impose costs right up until the moment it chooses to sign. The fire exchange proves retained capability and willingness, not necessarily strength in any absolute sense, but that is sufficient for the purpose. The fire exchange and the framework talks are the same signal about Iran’s intentions, sent through two channels at once. Iran is telling Washington: we are negotiating, and we are doing so because we choose to, not because you have forced us to. Firing while talking is leverage maintenance.

The Strait has become Schrodinger’s Strait – open and closed, at war and at peace, progressing toward a deal and actively exchanging fire, all at the same time. Every attempt to interpret it as one thing or the other misses the point. Both descriptions are accurate, which is what makes the current moment so hard to read and what markets keep getting wrong.

By the night of 8 May, the UAE had been struck for the third time in four days. The Fujairah oil facility, still burning from Monday’s attack, took another wave of drones and missiles. And for the first time, the UAE defence ministry confirmed publicly that it had responded, striking back at Iranian territory. Once a Gulf state is directly exchanging strikes with Iran, a US-Iran framework is not a sufficient settlement architecture – it is a bilateral instrument for a conflict that has become regional.

Base case, and two variations

The base case is that the Strait stays closed long enough for the supply shock to run fully through economic activity and earnings. “The Overdetermined Downturn,” “This Is Not an Oil Price Shock,” and “The Physical Track in Real Time” have covered the mechanism in detail. The short version is that this is a feedstock disruption, not a price shock, and feedstock disruptions do not reverse on the day of an announcement. The base case holds across both variations; what differs is how much worse it gets.

The base case holds not because a deal is impossible but because of what persists even after one is signed. The mine clearance problem alone means weeks of delay from any agreement. War-risk insurance designations do not clear with a ceasefire. Close to 900 vessels are suspended across the Gulf in various states of waiting, with over 150 in the immediate anchorage unable to exit. The UAE’s direct military engagement on Iranian territory is unresolved by a US-Iran MOU (Memorandum of Understanding) – the parties to that confrontation are not parties to the framework. And as I argued in “The Strait Was Always the Deterrent”, Iran may now be seeking to convert a temporary military reality into a permanent legal one – institutionalising its control of the Strait in any settlement framework rather than trading it away. If that is the objective, the Strait is a condition of any deal, not a concession within it, and the current MOU explicitly defers it.

The upside variation is a deal that produces a genuine market-clearing event – Hormuz reopens on a workable timeline, the physical constraints ease within months rather than years, and AI capex sustains enough economic activity through the lag that the damage proves containable. This is the scenario markets are currently pricing. The 7 May piece argued the strategic victory condition was met for Iran to accept something like this, and the deal has since become more tangible. Axios is reporting a 14-point MOU being negotiated by Witkoff and Kushner, with Pakistan as the channel, though the caveat applies that US officials have briefed imminent progress through the same channel before without it materialising. Trump told Fox News a deal could come within a week, then told reporters in the Oval Office that there is “never a deadline”. What has changed most is Iran’s sequencing: nuclear issues are Phase 2; Phase 1 is simply ending the war. The moratorium being discussed has converged around 12 years, a compromise between Iran’s five-year proposal and the US position of twenty.

One insightful reader made a point the 7 May piece missed: the US may have proposed twenty years because that duration hollows out the technical workforce, not just pauses the programme. Iran’s nuclear capability depends on accumulated expertise as much as on infrastructure – expertise and knowledge scientists and engineers build over decades does not survive a generation-long moratorium intact. If that is the US motivation, it makes the twenty-year figure a more significant concession for Iran than it appears, and explains why the Iranian side has been pushing to reduce the duration.

Iran was expected to respond to the MOU by 8 May. As of this writing, no response has arrived. This is where the “arbitration is missing” argument applies most directly. The Islamabad delegation had to return to Tehran for approval to sign, not because the leadership is divided in the conventional sense, but because the conversion mechanism is absent – factions can signal, they cannot commit. The positive signals from one channel and the fire exchange through another are not contradictory – they are both real, and both genuine, produced by a system in which no single actor can yet speak for the whole.

Israel is the veto player the current MOU framing largely ignores. Tehran has made clear it will not agree to any wider settlement without a halt to Israeli operations against Hezbollah in Lebanon. Netanyahu, speaking on 6 May, said he has “full coordination” with Trump and “no surprises” – yet his stated objective, the removal of all enriched material and dismantling of enrichment capabilities, lies well beyond what the MOU is currently reported to contain. If Israel concludes that the deal under-delivers on nuclear terms, its capacity to disrupt what has been agreed is proven.

Trump is meeting with Xi Jinping in Beijing next week. Arriving while the conflict is unresolved weakens his negotiating position with a China that has just directed its entities to not recognise US secondary sanctions on Iran – a direct counter-shot fired ahead of the summit. Xi is arriving with leverage; Trump needs the meeting to go well.

The downside variation is that no deal holds, or none is reached, and the conflict persists through the pattern that has defined the past three months. Each operational cycle launches, encounters allied resistance or Iranian military response, steps back, reframes diplomatically, and repeats. Project Freedom followed that template. The 8 May firefight, occurring while the framework was being discussed, is the clearest instance of the cycle yet. The interval between apparent normalisation and physical reassertion is shortening, not lengthening. Under this variation the base case economic damage is compounded by duration, and the feedstock disruption runs deep enough into supply chains and earnings to produce the credit deterioration that markets have consistently deferred pricing.

What changes and what doesn’t

Whichever scenario holds, the economic damage already in the pipeline keeps progressing. The feedstock mechanism described in prior pieces does not reverse on an announcement. Diplomacy shortens the duration of the disruption, but it does not run the clock backwards on effects already accumulating through supply chains and earnings. Markets have been pricing the announcement as the resolution, yet the announcement actually begins a much slower reckoning.

The scenario that has genuinely strengthened since 7 May is the deal, yet what has become more complicated is that deciding that any deal resolves the situation. The UAE’s confirmation that it responded to Iranian strikes on its territory is the clearest sign yet that the conflict has acquired dimensions the current MOU framework was not designed to contain.