Gunmen attacked an annual Iranian military parade in Ahvaz, a city in the oil-rich southwest of the country on Saturday, killing 25 people and wounding 60 others. There is confusion over the identity of the perpetrators of the attack; Islamic State claimed responsibility, but some media reports said the attack was the work of an Arab separatist group.
Publicly blaming U.S. "allies in the region," Iran's Supreme Leader Ayatollah Ali Khamenei insinuated that Tehran's rivals from the surrounding Gulf states were involved.
Tensions and rivalries have simmered between Saudi Arabia and Iran for decades. Despite their joint membership of OPEC, the oil producers are rivals, with both countries vying for geopolitical and religious influence in the region. Against this backdrop, Croft said that the latest attack in Ahvaz could provoke a wider regional conflict.
"With the Islamic Revolutionary Guards Corps warning that it will take a 'deadly and unforgettable revenge' against the perpetrators, the risk of the region's cold war becoming a hot one appears to be rising in our view," Croft and her fellow analysts, Christopher Louney and Michael Tran, said in a note.
"We also contend that the risk of such a destabilizing clash will only grow as Iran comes to feel the full effects of economic sanctions that are designed to radically alter the behavior of the ruling regime, if not change it."
In light of Saturday's attack, RBC Capital Markets raised the risk rating for both Iran and Saudi Arabia, regional Shia and Sunni powerhouses, respectively, in its "OPEC Watch List."
The head of Iran's National Security Council adopted a more conciliatory tone on Monday, saying that Iran needs constructive dialogue to avoid tensions with its neighbors, state-run news agency IRNA reported.
Iran is a key mover for oil markets with analysts watching to see what happens to oil prices as U.S. economic sanctions are fully implemented on its oil industry in early November. Oil prices rose 2 percent on Monday as concerns of sanctions and a tightening global supply weighed on markets.
OPEC and Russia have pledged to increase production to meet any shortfall created by an anticipated fall in Iranian crude oil production, but no official decision has been made yet.