Israel retaliation may target Iran oil infrastructure, analysts say

Oil markets got a rude awakening this week after Iran launched a massive ballistic missile attack on Israel, with crude prices briefly rising more than 5% on Tuesday after a period of weak trading.

For months, traders have largely ignored the risk of supply disruptions in the Middle East. Instead, bearish sentiment swept the market in September as investors grew increasingly worried about a surplus next year due to weak Chinese demand and rising OPEC+ output.

However, as Israel vows, the expanding war in the Middle East has reached a new boiling point “Painful” reaction Attacks on Iran. Prime Minister Benjamin Netanyahu's government may retaliate against the Islamic Republic's oil infrastructure, geopolitical and crude market analysts say.

“People are concerned about this war,” Helima Croft, global head of commodities strategy at RBC Capital Markets, told CNBC's “The Exchange” on Tuesday shortly after the attack. There is a lot of complacency. “We do need to think about the risks to Iran’s oil supplies. “

Retired U.S. Army Colonel Jack Jacobs said Israel could also target Iran's nuclear facilities, but those structures are hardened and difficult to destroy. He said an attack on these facilities could trigger a larger Iranian ballistic missile attack that would be difficult to defend against.

“What's really on the table now and more likely is an attack on an oil facility,” Jacobs said Wednesday morning on CNBC's “Squawk Box.”

Croft said OPEC member Iran's daily output exceeded 3 million barrels, a five-year high. U.S. intelligence services have in the past highlighted potential risks at Iran's Khag Island oil terminal, through which 90% of the country's crude exports pass, according to a report from RBC Capital Markets on Tuesday.

“The next turn in the revenge spiral is likely to involve oil – through the degradation of Iran's oil production capacity
or Iranian proxies attack oil and gas shipments in the Persian Gulf,” Piper Sandler analysts told clients in a research note on Wednesday.

Bob McNally, president of Rapidan Energy, said the impact on the oil market will depend on the damage to Iranian crude exports and how the situation escalates. McNally said if Iran's oil exports of about 1.8 million barrels per day were halted, prices could rise by at least $5 per barrel.

Iran, in turn, could retaliate by threatening the 13 million barrels per day of crude oil and 5 million barrels of products it produces and flows through the Persian Gulf, McNally said. The analyst said an upgrade of this magnitude could lead to a $10 per barrel increase in oil prices.

“The oil market is in a dangerous time right now,” Andy Critchlow, head of news for Europe, the Middle East and Africa at S&P Global Commodities Insights, told CNBC's “Signpost” Europe on Wednesday. “When you look at geopolitics When the amount of risk is there, it's difficult for anyone in the market to really judge the direction.”

However, Critchlow said OPEC has 5.6 million barrels per day of spare capacity it can bring back to the market, and Saudi Arabia is keen to bring as much oil back to the market as possible.

“I think any disruption to international market supply from Iran can be made up for by OPEC's spare capacity and the oil currently sitting idle,” the analyst said.

However, McNally said the oil wouldn't mean much if there was a major disruption in the Persian Gulf. “Spare capacity won't help as it's mostly trapped within the Strait of Hormuz,” the analyst said.