COMMODITIES 2025: Trump likely to expand oil sanctions on Iran, but may broaden tactics

This is part of the COMMODITIES 2025 series where our reporters bring you key themes that will drive commodities markets in 2025.

President-elect Donald Trump is widely expected to expand oil sanctions on Iran and its trading partners to deter Tehran from sprinting to obtain a nuclear weapon, but some experts say he may shift tactics in his second term and use more military intervention in the region as well.

In addition to the potential for a change in strategy, Trump will face challenges implementing strict sanctions, since Iran has had years to figure out how to evade them. And Trump's actions will be tempered by concerns about gasoline prices.

"The bottom line is Trump does not like high gasoline prices -- especially a rapid rise that would stoke inflation and discontent," according to S&P Global Commodity Insights' Monthly Global Crude Oil Markets Short-Term Outlook for January.

Assuming there is no sharp reduction in Iranian oil production, Dated Brent is expected to average $72/b in 2025, according to the outlook. But, the outlook noted, "If the market is much tighter -- such as the removal of 1 million b/d of Iranian oil exports -- prices could move back to $90/b or higher."

Trump's first term is not necessarily a template for his second term, said Brenda Shaffer, an energy expert at the US Naval Postgraduate School.

"The regional and global conditions have changed dramatically from four years ago and Trump's new team has a different approach to the world," she said.

Shifting strategy

After Israel's campaign against Iranian proxies Hamas and Hezbollah and the fall of Iran-aligned Bashar al-Assad in Syria, Tehran is much weaker and it is likely to sprint toward a nuclear option precisely because it is weaker, Shaffer said. This situation gives the US new policy options, she said.

"All arrows are pointed at Iran right now," she said. "Do we just freeze it this way where Iran is a bit weaker, it's lost its proxies? Or do we go one more step and take out the Iranian nuclear program and potentially some of its oil exports?"

Trump might pursue this policy by giving Israel more freedom to act on Iran, with US military support, Shaffer said. This would align with a more general approach to letting US allies do the job themselves without US forces being involved in every instance, she said.

The question, from an oil markets perspective, is not whether the US is going to condone Israeli action against Iran, but whether the circumstances on the ground spur Israel to act before the US weighs in, Kevin Book, managing director of ClearView Energy Partners, told S&P Global Commodity Insights.

"The precariousness of the situation right now from a nonproliferation perspective is such that Israel may see an existential necessity to act perhaps even sooner than the incoming administration might like," Book said.

Attacks against Iranian nuclear infrastructure or Iranian oil export facilities create the risk that Tehran will retaliate and attack regional oil production and transit infrastructure, Book said.

"You could get one of these very low odds, very high consequence tail cases out of this kind of scenario," Book said. "And it's not the sort of thing that I think an incoming administration would be eager for. Most presidents don't want triple-digit crude prices."

Shock and awe

One area where Trump may directly use US force is to stop the Houthi rebels from disrupting trade in the Red Sea, Shaffer said. This could be a quick, targeted action early in his term that would deliver results without drawing the US into a long engagement.

"There will be some kind of 'shock and awe' event, and this will lower oil transportation costs, LNG transportation costs and global inflation by a few points," Shaffer said.

Military and defense may be a part of Trump's Iran policy, in the form of providing military equipment and allowing Israel to engage rather than trying to restrain them, but sanctions will still be a part of the picture, Rachel Ziemba, senior advisor at political risk consultancy Horizon Engage, said.

Trump has talked about the limitations of sanctions more generally. In response to a question about Russian sanctions at a Sept. 5 address to the New York Economic Club, Trump said he would like to use sanctions as little as possible.

"The problem with what we have with sanctions -- and I was a user of sanctions, but I put them on and take them off as quickly as possible because ultimately, it kills your dollar, and it kills everything the dollar represents," Trump said.

But it is not clear Trump believes that about Iran, where the Trump team has been critical of what they see as underenforcement during the Biden administration, Ziemba said.

David Goldwyn, president of Goldwyn Global Strategies and chair of the Atlantic Council Global Energy Center's Energy Advisory Group, struck a similar note.

"I think they thought that the maximum pressure on Iran was effective in reducing Iranian exports and putting pressure on the regime," Goldwyn said. "So I think they will still think that's a good thing to do."

"I think sanctions on Venezuela, additional sanctions on Russia maybe have proven less effective," Goldwyn said.

Iran produced 3.22 million b/d of crude in November, according to the latest Platts OPEC+ Survey from Commodity Insights. Maximum pressure sanctions pushed Iranian crude output to as low as 2 million b/d in Trump's first term.

Maximum pressure

The SHIP Act, legislation co-sponsored by Secretary of State nominee Senator Marco Rubio, Republican-Florida, is a blueprint for maximum pressure sanctions on Iran in Trump's second term, Fernando Ferreira, director of geopolitical risk service at Rapidan Energy Group, said.

This approach would go beyond the "game of whack-a-mole" of sanctioning tankers and single-asset companies, Ferreira said. Instead, it would go up the value chain and threaten key financial institutions, oil terminals, terminal operators, and refineries, putting economically significant companies in China on the line, he said.

China is expected to accommodate US sanctions at least initially, and Beijing is already urging importers to diversify their supply, Ferreira said.

"Importing Iranian crude oil is just not worth the risk of being cut out from the US financial system," he said.