Tehran’s Reaction to U.S. Sanctions Could Lead to Military Conflict, Analysts Warn

The U.S. decision to reimpose sanctions on Iran will likely be met with a reaction from Tehran that could eventually cause some kind of “unintended military escalation,” RBC Capital Markets’ Helima Croft said in a note on Wednesday.

Croft and her team of oil analysts further said that Iran’s Supreme Leader Ayatollah Khamenei would most likely try to avoid a direct military confrontation and choose an approach of “contained escalation” with its rivals in the Middle East, including Israel and Saudi Arabia that back the sanctions.

However, the analysts add in their note that a risk still exists that any retaliatory measures could get out of hand.

“An unintended military escalation through miscalculation continues to be one of the most underappreciated risks in our view,” Croft and her team point out, according to CNBC. “Even if the probability of such a scenario remains relatively low, it would serve as the ultimate high-impact event for oil prices.”

What would also affect oil prices, RBC’s analysts said, were the reactions of Iran’s powerful rivals.

“If Tehran opts to avoid escalatory measures and attempts to wait out the Trump administration, the impact on oil prices would be more muted and largely limited to how many of its barrels are removed from the market by sanctions,” they wrote.

The U.S. sanctions on Iran’s oil industry will be reimposed on November 4 and will deal a heavy blow on the industry, port operators, shipping sector and petroleum-related transactions. Countries that will opt to continue buying Iran’s oil will likewise be hit with sanctions, the U.S. has warned.

Iran is expected to lose over 1.2 million barrels a day in the first quarter of 2019 as a result of the sanctions.

“Beyond the barrel loss and the tightening fundamental backdrop, we think oil’s fear premium could stage a comeback depending on the Iranian response,” Croft and her team wrote, further stressing that global oil supply and prices could also be influenced by geopolitical events affecting other oil producers including Venezuela, Nigeria and Iraq.

“We started the year warning that the economic and political crisis in Venezuela could cause its production to plunge by close to 1 mb/d in 2018; we now anticipate that the snapback of U.S. sanctions could take similar volumes of Iranian exports off the market as the year comes to a close,” Croft said.