(Bloomberg) — Iran’s oil production has defied years of US sanctions to return to almost full capacity — a tide of supply that looks increasingly vulnerable as tensions with Israel flare.

Most Read from Bloomberg

The Islamic republic’s output has climbed by a third in the past two years to reach 3.4 million barrels a day, as cut-price supplies attracted Chinese buyers, according to data compiled by Bloomberg. It’s just a few hundred thousand barrels a day short of the levels pumped before then-president Donald Trump re-imposed sanctions in 2018.

Extra Iranian barrels have been able to enter the market — helping to moderate world crude prices — with the tacit approval of US President Joe Biden’s administration. Even as tensions between Tehran and Tel Aviv have reached unprecedented levels, in an election year the White House has prioritized taming gasoline costs over tougher enforcement of sanctions.

The current military escalation threatens these supplies.

“Iran is having success exporting thanks to a willing customer in China, the increased sophistication of illicit transportation channels, and the relatively low interest in the US to take action,” said Henning Gloystein and Greg Brew, analysts at Eurasia Group. “There’s a risk that Israel strikes Iranian oil facilities.”

Eurasia group doesn’t think Iran’s oil infrastructure would be Tel Aviv’s top target, but even the possibility has spooked markets. Crude jumped 5% on Thursday after Biden said the US was discussing whether to support such an attack by Israel. West Texas Intermediate futures rose a further 1.5% to $74.81 a barrel as of 7:49 a.m. in New York.

Iran and Israel have long been bitter enemies, but have come increasingly into direct conflict in recent months. In Lebanon, Israeli forces have been battering key Iranian proxy Hezbollah, assassinating its leader Hassan Nasrallah. In response, Tehran launched a large missile strike against Israel this week.

The Biden administration is still in talks with Israel about the country’s response to these attacks, and believes that no decision has been taken yet, a US official said on Thursday. Pentagon deputy spokeswoman Sabrina Singh said talks between the US and Israel are “more about trying to understand what their response might be.”

Hitting the oil industry would do Iran great economic damage, either by targeting refineries that process domestic fuel supplies, or export facilities that provide vital revenue. There are reasons that Israel may be reluctant to do the latter. Such a move would upset Tel Aviv’s partners, including the US, the European Union and Gulf states, ANZ Group Holdings analysts Daniel Hynes and Soni Kumari said in a report.

Even if a direct attack from Israel doesn’t happen, Tehran’s oil comeback could still be at risk.

The Biden administration’s willingness to turn a blind eye to sanctions could change, and the president has already warned of new measures as tensions have mounted. Alternatively, if Trump is reelected, he could renew the campaign of “maximum pressure” that squeezed Iranian shipments during his previous term.

“We don’t buy the prevailing view that US sanctions are now toothless,” said Fernando Ferreira, director of geopolitical risk service at Washington-based consultants Rapidan Energy Group. “Lax enforcement is a policy choice that could change,” depending on the presidential election results.

Still, any renewed crackdown would run into obstacles.

China has largely ignored Western sanctions, importing record levels from Iran as smaller refiners in Shandong province — often known as “teapots” — binge on cut-price barrels. These customers are largely detached from the global financial system, and their purchases are enabled by well-connected intermediaries.

The logistical network that has evolved to transport Iranian cargoes — and, since Moscow’s invasion of Ukraine in 2022, shipments from Russia — has proved robust. Shipments are typically ferried using a so-called “shadow fleet” of aging tankers, decanted from one vessel to another in a process known as “ship-to-ship” transfers, or else re-branded as imports from non-sanctioned — though highly unlikely — countries such as Malaysia.

Vessels often turn off identification transponders, making Iranian flows difficult to track. As a result, several institutions — like the International Energy Agency and consultants FGE — have higher estimates than data compiled by Bloomberg, while others such as Kpler Ltd. are lower.

If Israel does attack Iran’s oil production facilities, the Organization of Petroleum Exporting Countries and its allies have spare capacity that could cover any shortfall, according to ANZ.

Led by Saudi Arabia — another of Iran’s regional rivals — the group has been trying to restore some of the production it has halted since late 2022. But with world oil demand growth subdued and production climbing elsewhere, OPEC+ was forced to delay its planned increases by two months.

Iran is a member of OPEC, but has been exempt from cartel’s production limits because of US sanctions. As such, Tehran’s production rebound has been undermining the group’s efforts to support crude prices by restraining output.

“Together with overproduction from other OPEC+ countries, the steady Iranian increases are significant in aggregate,” said Jamal Qureshi, managing director for strategy and analysis at tanker-tracking firm Petro-Logistics SA. “That has surely had a major impact on OPEC’s desired outcome and their ultimate goal.”

–With assistance from Jake Lloyd-Smith.

(Updates with oil price in sixth paragraph.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.