Iran-U.S. escalation could be on the horizon, analysts warn

Iran and the U.S. are edging closer to a renewed confrontation, analysts have warned, as Tehran grapples with mounting economic strain and deepening reliance on China as its primary crude buyer.

“We’re seeing warnings from both sides that the next round of conflict is going to be more extensive than what we saw in June,” Torbjorn Soltvedt, a Principal Middle East & North Africa Analyst at Verisk Maplecroft told Gas Outlook.

“I think in terms of the utility of military force from the U.S. at the time, it’s much less clear-cut than in June and it’s not exactly clear what the U.S. wants to achieve,” he added.

Iran has faced ongoing deadly protests since the end of last year, leaving between 3000 and 30,000 dead, depending on the source. U.S. president Donald Trump has threatened military intervention in response for weeks, following U.S. intervention in Venezuela, which saw the capture of president Nicholas Maduro. Strikes against the security apparatus, such as the besieged militia, the Revolutionary Guard, and other parts of the security apparatus, are likely to be among the options if the White House seeks to intensify pressure on Iran’s leadership, Soltvedt added.

Further escalation risks wider regional destabilisation and could deepen the strain on Iran’s already struggling economy. Tehran has also demonstrated a willingness to retaliate against regional U.S. allies.

“Globalisation is good for the Gulf and things that push back the tide of globalisation are more of a challenge,” Jim Krane, a fellow in Middle East Energy Studies at the Arab Center Washington DC & co-director of the Middle East Energy Roundtable at Rice University’s Baker Institute for Public Policy said. “I don’t think they want to be forced to pick sides.”

Regional conflict carries significant risks, including refugee flows, disruption to key shipping routes, infrastructure damage and reduced foreign direct investment. Even if hostilities remain contained within Iran, the impact would likely spill across borders. Previous attacks triggered only a temporary spike in oil prices, but sustained disruption to Iranian production could remove around 1.3 million barrels per day from global supply.

Despite uncertainty over Washington’s endgame, Iran appears increasingly boxed in. The loss of Assad in Syria deprived Tehran of a key ally, while its proxy group Hezbollah has become harder to arm and finance. At the same time, the U.S. and Israel have tightened sanctions, and IRGC is being more frequently designated as a terrorist organisation.

Energy exports remain Iran’s economic lifeline. The country is now heavily dependent on China as a crude buyer, with at least 80% of its exports flowing to Chinese markets, according to Maplecroft. Much of that demand comes from smaller so-called ‘teapot’ refineries, which are small enough to evade U.S. sanctions. Smaller volumes are exported via Iraq, while some cargoes are believed to be traded through ship-to-ship transfers, helping to obscure origin and destination.

The dynamic echoes Europe-Russia gas relations, long a source of concern that intensified following Russia’s aggression towards Ukraine. Since then, both sides have scrambled to diversify trade flows.

Chinese crude buyers

For Iran, sanctions have become both a constraint and a bargaining chip. They allow Chinese buyers to secure crude at discounted rates, reinforcing Beijing’s leverage. But if Chinese demand were to fall, Tehran would have few alternative outlets — leaving oil as both its central strength and its main vulnerability.

“Sometimes we can kind of see reflected in the figures, the official figures that China will increase imports from Iran, put pressure on the U.S., and then they can use that as a bargaining chip,” Soltvedt said. “Other times it’s a bit more kind of under the radar, smaller independent refineries that have no links to the international financial system have no exposure to the dollar. They can afford to breach sanctions more so than larger entities that have interest and financial exposure around the world”

While China is a crucial economic partner, it has shown little appetite for assuming security risks on Tehran’s behalf. Economic realism shaped Beijing’s approach towards the U.S. in Venezuela and is likely to guide its actions in the Middle East. China has demonstrated a preference for trade and economic leverage over military power. Gulf states, meanwhile, may wish for an alternative security partner, Krane said, but there is no credible substitute for the U.S.

With protests largely driven by economic grievances, any further deterioration could fuel additional unrest. Still, analysts caution against underestimating the regime’s resilience, particularly its domestic security apparatus.

“I think the perception that the regime is teetering on the brink and just needs a little push, is incorrect,” Krane said.

(Writing by Miriam Malek; editing by Sophie Davies)