Recently, the situation in the Middle East has heated up sharply, and Iran has launched a large-scale missile attack on Israel, raising global concerns about Israel's possible counterattack. Analysts noted that Iran produces more than 3 million barrels of oil per day, and any supply disruption could have a significant impact on global markets, depending on Israel's retaliatory actions and their scale.

As a result, WTI crude oil futures rose more than 5% on Thursday to as high as $74.09 a barrel and closed at $73.71, up 5.15%. Brent crude futures rose 4.98% to close at $77.58, breaking above the 50-day moving average for the first time since July and marking the longest winning streak since August.

Israel's response has a direct impact on oil prices

At the moment, the oil market is not alert enough for the potential for major supply disruptions. With Israel likely to retaliate against Iran, particularly against its oil infrastructure, the situation could have a surprise shock for energy market participants with a bearish stance.

As the third-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC), Iran's importance cannot be underestimated. Crude oil is transported through the Strait of Hormuz, which accounts for one-fifth of global demand, in addition to large quantities of liquefied natural gas being transported through this important shipping lane. Saudi Arabia, Iraq, U.A.E., Kuwait and Qatar all rely on this critical corridor for shipments. If Israel's strike targets Iran's oil facilities, global supply is expected to be at risk of up to 4%.

Bjarne, chief commodity analyst at Sweden Bank SEB In an interview, Schieldrop noted that the escalation of the situation in the Middle East could have a significant impact on the market. He said that if Iran's oil facilities are severely damaged, resulting in a reduction of exports of 2 million barrels per day, the next concern of the market will be the security situation in the Strait of Hormuz. This will undoubtedly push up the risk premium on oil prices, and may even send them soaring above $200.

Traders are concerned that rising tensions will affect oil supplies in the event of an attack on energy facilities or a blockage of supply routes. Francesco, an analyst at Citi In its report released on Wednesday, Martoccia mentioned that Israel's major blow to Iran's export capacity could lead to a 1.5 million barrel per day supply reduction. If the attack targets small infrastructure, such as downstream assets, it can lose between 300,000 and 450,000 barrels of production per day.

Taken together, these developments have added new uncertainties to the oil market. The ultimate impact on the global oil supply-demand balance and prices will depend on Israel's specific response and whether Iran's oil industry suffers actual damage.

The escalation of the conflict could lead to a spike in oil prices

With the escalation of the conflict in the Middle East, if Israel launches a strike against Iran's "oil island", the Kharg Island oil terminal, it may trigger a sharp rise in international oil prices.

On October 4, after Iran's missile attack on Israel, Kharg Island, as a key node for Iran's oil exports, is very likely to be the next target for Israel. According to Lawfare Gerard, Senior Attorney at Project Filitti analyzed that the attack on the oil terminals on Kharg Island would be extremely destructive, as about 90% of Iran's oil exports pass through these terminals. If the facility is damaged, international oil prices are expected to soar by more than 10% immediately and are likely to continue to rise.

According to the United States Energy Information Administration (EIA), most of Iran's crude oil is exported through Kharg Island, located in the northeastern Persian Gulf, which is known as Iran's "oil island."

Brent crude has risen 8.5% this week on concerns about possible disruptions in crude supplies in the Middle East, while the price of United States benchmark West Texas Intermediate crude has also risen 8.1%.

In addition, escalating tensions between Iran and Israel have also weighed on United States stocks, leading to a possible decline in the Dow Jones Industrial Average and the S&P 500 this week. However, the energy sector in the S&P 500 is expected to rise more than 5% this week.

However, Catalyst Simon, Co-Manager of the Energy Infrastructure Fund Lack noted that the oil market may have partially priced in the risk of 1.5 million barrels per day of oil supply disruption due to Israel's attack on Iran's infrastructure.

These gains are likely to be limited in the long run

Energy analysts have warned that bearish sentiment on oil prices remains prevalent in the market, even as tensions rise in the Middle East. Previously, a number of Wall Street institutions have publicly expressed a long-term bearish attitude towards oil prices.

Energy Amrita, Founder and Head of Research at Aspects Speaking to the media on Thursday, Sen said: "I think the current market is too complacent from an oil market perspective. Since 2019, when a drone attack on a Saudi oil facility halved production capacity, geopolitical risks have not significantly affected oil prices. This is why the market has become numb to such risks. But I think it's different this time. ”

At the same time, John is an analyst at the oil brokerage company PVM In a research note released Thursday, Evans noted that history shows that oil prices react "very differently and violently" to missile attacks and bombings in Middle Eastern countries. Any price rally could also be amplified by the extreme bearish sentiment in the market before.