The situation in the Middle East has rapidly escalated recently. Iran recently launched a large-scale missile attack on Israel, and the world is nervous about Israel's possible retaliation methods. According to media reports, when asked if he would support Israel in attacking Iran's oil facilities, US President Joe Biden said, “We are discussing this.”

Analysts said that Iran's daily production exceeds 3 million barrels, and if there is a supply interruption, it could have a significant impact on a global scale, and this is closely related to the method and scale of Israel's retaliation. Affected by this, $Crude Oil Futures(NOV4) (CLmain.US)$ The price rose by more than 5.69% on Thursday, reaching a new daily high of 74.09 US dollars/barrel, and is now reported at 73.84 US dollars. Brent crude futures rose 4.98% to $77.58, rising above the 50-day EMA for the first time since July and the longest continuous upward trend since August.

Analyst: The trend in oil prices depends on how Israel responds

Analysts believe that the oil market is not alert enough to impending major supply disruptions. As Israel may plan a retaliatory attack on Iran, which could target its oil infrastructure, this outlook could shock bearish energy market participants.

Iran is the third-largest oil producer among the member countries of the Organization of Petroleum Exporting Countries (OPEC). The supply of crude oil passing through the Strait of Hormuz accounts for one-fifth of global demand, and a large amount of liquefied natural gas is also transported through this waterway. Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, and Qatar send their goods through this critical waterway. If Iran's oil infrastructure is targeted by Israel, it is estimated that global supply could be at risk of up to 4%.

Bjarne Schieldrop, chief commodity analyst at Swedbank SEB, told the media that the escalation of the situation in the Middle East could have a significant impact on the market.

“If... you actually destroy Iran's oil facilities and cut exports by 2 million barrels, then the next question in the market is what will happen to the Strait of Hormuz? This will of course bring a significant risk premium to oil prices,”

“If Iran's facilities are destroyed, the price of oil can easily break through $200.”

Traders are concerned that the latest escalation of tension could affect supply if energy facilities are attacked or supply routes are blocked. Citibank analyst Francesco Martoccia pointed out in a report on Wednesday that Israel's major blow to Iran's export capacity could reduce daily supply by 1.5 million barrels in the market. If Israel attacks small infrastructure such as downstream assets, it could lose 0.3 million to 0.45 million barrels of production.

Analysts believe that these developments have added another layer of uncertainty to the oil market. The ultimate impact on the global oil supply and demand balance and price depends on Israel's level of response and whether it sees any actual damage to Iran's oil industry.

Israel continues to be tough on Biden: discussions are under way on whether to support attacks on Iran's oil facilities

Israeli Prime Minister Binyamin Netanyahu said on Tuesday that he would respond strongly to Iran's missile attacks and insisted that Tehran would pay for what he described as a “major mistake.” Earlier, Iran fired more than 180 ballistic missiles at Israel. Iran claims that the missiles hit some Israeli military facilities.

On Thursday, during a visit to Qatar, Iranian President Masood Pezeshki said Iran “is not pursuing war with Israel.” However, he warned that Tehran would respond strongly to any further Israeli action.

When asked if he supports Israel's attack on Iran's oil facilities, US President Joe Biden replied on Thursday: “We are discussing this issue.” But he also said he did not expect Israel's retaliation to happen on Thursday.

According to Schieldrop, “It all depends on how the conflict further escalates. I think Israel will retaliate after the latest Iranian attack — probably within five days, just before the first anniversary of October 7. Would this be... a slight attack like the one we saw in April, after which everything calms down? Or will it be a more intense attack on military facilities, potential nuclear facilities, and oil facilities? This is exactly what the market is worried about right now.”

Speaking about Israel's possible retaliation, Rabobank's Michael Every said on Wednesday that “compared to Hamas, Hezbollah, and the Houthis, Israel's target list is relatively short” and that oil and gas infrastructure is the most likely target.

Rebecca Babin, a senior energy trader at CIBC Private Wealth, said:

“It's not entirely surprising to the market that energy infrastructure is now being viewed as a potential target, but Biden's comments are bringing that possibility closer. There are some doubts in the market about whether Israel will actually target oil facilities, mainly because the Biden administration wants to keep oil prices stable until the upcoming election.”

Is the energy market too complacent? Bears may be squeezed out

Energy analysts warned that despite heightened tension in the Middle East, there is still a general bearish sentiment in the market. Earlier, Wall Street agencies have stated that they have been bearish on oil prices for a long time.

Amrita Sen, founder and head of research at Energy Aspects, told the media on Thursday. “I do think that from the perspective of the oil market, the current market is very complacent. Since Saudi oil facilities were attacked by drones in 2019, causing half of production capacity to shut down, geopolitical risks have not led to a loss in oil price supply. That's why the market has become numb, and I think things are a little different this time around.”

Meanwhile, John Evans, an analyst at oil brokerage firm PVM, said in a research report released on Thursday that historically, oil prices have shown “very different and intense reactions” to missile attacks and bombings in various Middle Eastern countries.

“Needless to say, anything related to Israel will influence fierce attitudes in history, but from the perspective of oil prices, the entry of Iran, which has more influence, should be beneficial to bullish players. The spread of the war and the damage it caused will need to be proven before market participants are free from widespread suspicion.”

Analysts said that any price rebound could also be exacerbated by the extremely bearish attitude of the oil market prior to today's events. Continued short positions mean money managers and hedge funds must now close positions quickly or fall into passivity when prices soar.

However, analysts still believe that in the long run, these increases may be limited as market participants realise that OPEC member states may resume supply in the event of an emergency, and they have been cutting production until now.

Editor/Somer