Highlights

US leniency on Iranian oil sanctions may end

Israel could target Iran's infrastructure in retaliation

No evidence yet of Iran's direct involvement in attack

Clarifying Iran's role in Hamas' surprise attack on Israel could send shockwaves through US President Joe Biden's approach to Tehran, with implications for global oil supplies.

The Biden administration has been a staunch advocate of diplomatic negotiations with Iran, bashing the Trump-era maximum pressure strategy and expressing disinterest in another Middle East conflict and potential forever war. This purportedly led to loosening enforcement of oil sanctions in pursuit of an informal understanding meant to curtail progress in Iran's nuclear program.

But such an approach, already under heavy scrutiny by Republicans and pressured by Iran's provision of drones to Russia for use against Ukraine, could fall by the wayside if a direct link between Iran and the attack against Israel is found. And Iran could find its crude oil production and export capabilities threatened from both heightened sanctions scrutiny and physical attack, geopolitical experts said.

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A tougher stance on Iran, however, could further tighten global oil supplies, creating some difficult decisions for Biden, who has struggled with limited options for keeping domestic gasoline prices low. NYMEX November RBOB settled 4.59 cents higher at $2.2381/gal on Oct. 9.

At least 500,000 b/d of Iranian oil exports are at risk depending on the reaction from the Biden administration, according to S&P Global Commodity Insights analysts.

"Before the war, US-Iranian tensions had eased, which facilitated higher Iranian oil exports. Iranian crude oil production increased 500,000 b/d from March to September 2023 -- to 3.1 million b/d from 2.6 million," the analysts said. "Biden will be under pressure to enforce sanctions and curtail Iranian export revenue. This is a challenging situation for the Biden administration, which wants more oil on the market, not less. The attacks on Israel could override the oil issue."

Reduced leniency

With Iran's crude oil production on the rise, its exports have also recovered despite sanctions.

"We have suggested that this recent surge in Iranian crude and condensate export volumes could be ascribed to rapprochement between Washington and Tehran via discretionary enforcement of US sanctions," analysts at ClearView Energy Partners said in a note. "If so, we would suggest that Iran's fingerprints on the attacks could reduce political space for the White House to pursue such leniency."

The note added that "enforcing or imposing tighter strictures could provide a bullish knock-on to supply tightness" as ClearView analysts have projected that demand could exceed supply by about 1.1 million b/d by the end of the year.

Height Capital Markets senior policy analyst Benjamin Salisbury offered Oct. 9 that increased sanctions and sanctions enforcement by the US and other entities could put pressure on Iranian crude shipments to China.

"The Biden administration could take this step of their own initiative, which we see as likely for the immediate future," Salisbury said. "However, Congress could also require additional and potentially longer-lasting measures by passing legislation such as the Stop Harboring Iranian Petroleum Act."

Authored by Senators Maggie Hassan, Democrat-New Hampshire, and Marco Rubio, Republican-Florida, the SHIP Act would impose sanctions on entities that facilitate refining and shipping of Iranian oil, including foreign ports that knowingly accept shipments and vessels engaging in ship-to-ship transfers.

Iran link?

The drone attacks, rocket strikes, boots on the ground and mass kidnappings by members of Hamas and the Palestinian Islamic Jihad showcased "sophisticated operational planning," suggesting the operation had the aid of a state actor, most likely Iran, Hudson Institute senior fellow Can Kasapoğlu said Oct. 9.

While applauding its surrogates' actions against Israel, the Iranian foreign ministry has denied any connection to the militant groups' attack, and the US State Department and Israeli government officials contend they have not yet seen evidence that Iran directed or was behind the attack.

Salisbury stressed that the nuance between Iran directing the assault and just giving its nod of approval after being presented with the plan should not be overlooked as it could determine whether and to the extent Israel looks to target Iran in its reprisals.

"Israel could retaliate against Iran either broadly or strategically in a way that affects oil infrastructure, the country's largest industry," Salisbury said. "This could include both targeted strikes and a broader military conflict that limits oil flows."

US response

Others were bolder in their callout of Iran.

"All of the indicators point toward Iran and of course we have today Hamas officials giving thanks to Iran, so it's not like that's a great mystery," Michael Doran, senior fellow and director of the Hudson Institute's Center for Peace and Security in the Middle East, said, reflecting the sentiment of many Washington observers.

Doran noted that Hamas is a proxy of Iran and the Palestinian Islamic Jihad is an extension of Iran. With the attack, Iran has already succeeded in driving a wedge in efforts to normalize Saudi-Israeli relations, and the likely need for Israel to mount a ground incursion into Gaza will "further inflame relations between Israel and just about every Arab and Islamic country," he said.

Talks on normalization of Israeli-Saudi relations were expected to potentially include a security understanding between the US and Saudi Arabia. Oil market watchers believed such security guarantees could have spurred increased Saudi crude production or at least better communication between Riyadh and Washington on that front.

Israel's focus on Hamas puts those talks on ice though there remains some potential that the conflict could push "Saudi leadership further from the Palestine/Hamas approach and toward seeking greater security ties to the US in the face of threats from Iran," Salisbury said.

But Doran asserted that the US strategy toward Iran -- including the recent unfreezing of $6 billion in Iranian oil revenue, failures to rein in Iran's nuclear program and lax enforcement of existing oil sanctions -- has inadvertently encouraged Tehran to play the role of regional disruptor.

"We really need an American policy that understands the role that Iran is playing as the coordinator, facilitator and strengthener of all of the elements that are trying to undermine the American order in the region," Doran said. "If Iran understands that things that it holds dear are in danger from the US ... then we have a much better chance of containing this to Gaza and giving the Israelis the time and the resources that they need to come out of this victorious."

Doran warned that any scenario in which Israel does not appear to be the victor in this conflict will inevitably invite more acts of violence by terrorist groups.