Brent at $120, the Iranian threat and the China factor: what will happen to oil after the Israeli strikes?

The cost of Brent crude oil jumped more than 13% on Friday amid the escalating conflict between Israel and Iran, although later the growth rate slowed down. A new round of tension in the Middle East has increased geopolitical uncertainty in the global oil market. Prior to that, crude oil prices were mostly down due to concerns about the global economy and OPEC+ supply increases. Analysts explain what risks there are for the sector due to Israeli strikes, what Iran is capable of responding with, why China is holding it back and what will happen to prices in the future.

If Iran's oil and gas production, transportation and storage assets come under attack, exports of up to 1.7 million barrels of oil a day could be at risk, noted Warren Patterson, head of commodities strategy at ING Groep NV. His research note was quoted by Bloomberg. This will be enough for the oil market to be in deficit instead of surplus in the second half of the year, the analyst believes.

The cost of Brent crude futures could then jump to $80 a barrel, Patterson said, although he is leaning toward a scenario in which the price stabilizes at around $75 a barrel.

But if the escalation continues and disrupts shipping through the Strait of Hormuz, some 14 million export barrels a day would already be at risk, Patterson warned. Significant disruptions could raise the price to $120 a barrel, and if the disruptions persist through the end of the year, Brent could hit an all-time high of more than $150 a barrel in 2008, the analyst added.

Charu Chanana, chief investment strategist at Saxo Markets Ltd. in Singapore, partly agrees that Brent crude could jump to $80. But rising production from OPEC+ could limit that rise and reignite fears of oversupply closer to the fall, she conceded.

«Worst-case scenarios - such as closing the Strait of Hormuz or disrupting Iran's 2.1 million barrels a day of exports - could have serious implications for global oil supplies and inflation expectations,» she said.

Israel's strikes on Friday suggest it was more of a pre-emptive attack than the start of a protracted military conflict, said Robert Rennie, head of research for commodities and carbon markets at Westpac Banking Corp. He was quoted by Bloomberg.

«Nevertheless, traders will now be watching Iran's reaction extremely closely - how directly it will be directed at Israel, rather than realized through proxy forces. Risks ahead of the weekend are very high and a rise in oil prices above the January highs is possible,» Rennie said. 

He estimates that oil prices will approach the lower end of the $60 to $65 range as we approach the third quarter, and could fall below $60 by the fourth quarter.

- The market is now «only partially factoring into prices the risk of wider conflict and supply disruptions» given that the Middle East provides a significant share of global oil supply, noted Vandana Hari, founder of Singapore-based analytics firm Vanda Insights.

- «The scale of this [Israeli] attack was closer to the most severe of all possible scenarios that most people envisioned,» said Saul Kavonich, an energy market analyst at MST Marquee. He added that Iran's response «could draw the U.S. and other countries in the region into the conflict.» 

«The conflict would have to escalate to the stage of an Iranian response on oil infrastructure in the region for oil supplies to really be seriously affected. In the worst case, Iran could disrupt exports of up to 20 million barrels of oil per day by attacking infrastructure or restricting passage through the Strait of Hormuz. So far, there are no signs of such a development,» Kavonich believes.

- There is «no net benefit» to Iran from preventing oil from passing through the Strait of Hormuz, especially since its oil infrastructure has not been directly attacked, said CNBC's Ellen Wald, co-founder of Washington Ivy Advisors. Any such actions by Tehran would likely invite further retaliation. In addition, a surge in oil prices caused by the closure of the strait could trigger a negative reaction from Iran's biggest oil buyer, China, she added. According to data from Reuters, China buys more than 75 percent of all Iranian oil exports.

- «Their friends will suffer more than their enemies ... So it's very hard to imagine this happening,» Anas Alhaji, managing partner of Energy Outlook Advisors, told CNBC in a statement. Closing the canal could be more of a curse than a boon for Tehran, given that most of Iran's daily consumption goods come through that route, he added.

- «The risks of the situation escalating into a broader regional conflict remain high,» announced analysts at Bloomberg Economics, including Jennifer Welch, Adam Farrar and Tom Orlick. They said the most obvious blow to the global economy would come through higher energy prices.

- «The threat of war in the Middle East has a significant impact on freight rates,» announced Anup Singh, head of global shipping research at Oil Brokerage Ltd. «While it is not possible to accurately predict the development of this growing conflict, a short-term spike in freight rates is highly likely,» he added.

He said about 15% of the world's fleet of major crude oil carriers is in the Persian Gulf in the Middle East at any given time, and about 20 of those tankers transit the Strait of Hormuz every day.