The U.S.-Iran war will likely not end with regime change but with an IRGC-dominated government as hardline as any before it, according to Former Under Secretary of Defense Michèle Flournoy, who served under President Obama.

Although the majority of Iranians oppose the regime, the IRGC remains deeply entrenched. Regime change would require elites and security forces to switch sides, and there are no signs of that happening, Flournoy said in an appearance on CNBC.

Polymarket traders agree, pricing a 78% chance the regime survives through 2026 on $12.6 million in volume.

Flournoy also argued there was no imminent threat justifying the operation, calling it a manufactured rationale emboldened by the administration’s experience in Venezuela.

The Strait Of Hormuz

The central problem, she argued, is the Strait of Hormuz, which is Iran’s primary leverage. It would be difficult for the Trump administration to declare victory while the Strait remains closed. Seizing Kharg Island is within U.S. capability, but holding it would be costly, Flournoy added.

Polymarket prices the chance that the U.S. controls Kharg Island by June 30 at 31%.

If Flournoy is right, the supply disruption that has driven Brent crude from the mid-$70s to near $120 since late February doesn’t unwind on any near-term timeline. A hardened IRGC regime keeps its leverage over the Strait, and no ceasefire normalizes shipping.

A ceasefire contract with $75 million in volume prices a 66% chance of a deal by June 30, though Iran rejected a U.S. 15-point proposal last week.

The Energy Trade

The Energy Select Sector SPDR Fund (NYSE:XLE) is up roughly 37% year-to-date while the S&P 500 is down about 5%.

Exxon Mobil Corp (NYSE:XOM) is down nearly 5% today on fears the war may end soon, trading around $161. Chevron Corp (NYSE:CVX) is down 4% today, trading at roughly $198.

The question for energy investors is how long the war premium lasts. If Flournoy is right that the conflict ends with a hardened IRGC regime still holding leverage over the Strait, today’s sell-off on ceasefire hopes may prove premature.

Flournoy said the administration faces three options: buy more time for negotiations, declare victory, or escalate to de-escalate. President Donald Trump is scheduled to address the nation at 9 p.m. ET this evening, with what the White House called “an important update on Iran,” which may offer clarity on which path he chooses.

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