The oil market faced a rude awakening this week after Iran launched a large-scale ballistic missile attack against Israel, briefly sending crude prices more than 5% higher Tuesday after a period of sleepy trading.

For months now, traders have largely dismissed the risk of a supply disruption in the Middle East. Instead, bearish sentiment swept the market in September as investors increasingly fear a surplus next year due to softening demand in China and increased production from OPEC+.

The expanding war in the Middle East, however, has reached a new boiling point as Israel has vowed a “painful” response to Iran’s attack. The government of Prime Minister Benjamin Netanyahu could take aim at the Islamic Republic’s oil infrastructure in retaliation, geopolitical and crude market analysts say.

“There has been a lot of complacency about this war,” Helima Croft, head of global commodity strategy at RBC Capital Markets, said on CNBC’s “The Exchange” Tuesday shortly after the attack. “We do need to think about a scenario where Iranian oil supplies are at risk.”

Israel could also take aim at Iran’s nuclear facilities, but those buildings are hardened, making them difficult to destroy, said retired U.S. Army Colonel Jack Jacobs. A strike on those facilities could trigger an even larger ballistic missile attack by Iran that would be difficult to defend against, he said.

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

OPEC member Iran is producing at a five-year high of more than 3 million barrels per day, Croft said. U.S. intelligence in the past has highlighted the potential risk to Iran’s Kharg Island oil terminals, through which 90% of the country’s crude exports pass, according to a Tuesday note from RBC Capital Markets.

“The next turn in this retaliation spiral may very well involve oil – via the degrading of Iran’s oil capacity
or Iran’s proxies attacking oil and gas shipping from the Persian Gulf,” Piper Sandler analysts told clients in a Wednesday research note.

The impact on the oil market would depend on the damage done to Iranian crude exports and how the situation escalates from there, said Bob McNally, president of Rapidan Energy. If Iran’s oil exports of around 1.8 million bpd were taken offline, prices would likely jump by at least $5 per barrel, McNally said.

Iran, in turn, would likely retaliate by threatening the 13 million bpd of crude and 5 million bpd of products that are produced in and flow through the Persian Gulf, McNally said. An escalation on this scale could send oil prices higher in increments of $10 per barrel, the analyst said.

“These are dangerous times for oil markets at the moment,” Andy Critchlow, EMEA head of news at S&P Global Commodity Insights, told CNBC’s “Street Signs” Europe Wednesday. “It’s hard for anyone in the market to really gauge the direction when you look at the amount of geopolitical risk that is out there.”

OPEC, however, has 5.6 million bpd of spare capacity that can be brought back to the market with Saudi Arabia keen to bring as much of its oil back to the market as possible, Critchlow said.

“Any disruption to Iranian supplies to the international market I think could be made up by spare OPEC capacity and it’s idled oil at the moment,” the analyst said.

McNally, however, said this oil won’t mean much if there is a major disruption in the Persian Gulf. “Spare capacity won’t help because it’s mostly bottled up inside the Strait of Hormuz,” the analyst said.

Israel’s government has vowed a severe response to Iran’s unprecedented missile barrage into Tel Aviv, leaving the Middle East on edge as fears rise over a possible all-out war between the two long-time foes.

On Tuesday evening, Iran launched roughly 180 ballistic missiles at several sites across Israel, an attack Tehran said came in response to the Israeli assassination of Hezbollah chief Hassan Nasrallah the week prior.

Israeli authorities say there were no casualties as a result of the offensive, and that most of the strikes were intercepted. But the event marked a turning point in a series of escalatory tit-for-tat moves, as Tehran appeared adamant to re-set deterrence and prove to Israel that it could — and would — attack at a time of its choosing.

Markets are now braced for what could follow a likely Israeli retaliation against Iran. Defense stocks are rallying — and long-subdued oil prices may also be set for increases, as industry watchers now see a real threat to crude supplies.

As much as 4% of global oil supply is at risk as oil infrastructure in Iran — one of OPEC’s largest crude producers — could become a target for Israel.

Oil prices gained over 5% in the previous session following the missile strike, before tapering to a 2.5% climb. The December delivery contract of global benchmark Brent was trading at $75.37 per barrel at 10:30 a.m. in London, while front-month November U.S. West Texas Intermediate futures were up 2.68% to $71.70 per barrel.

“I think this focus might be on Israel, but the focus should really be on Iran, and whether there will be attacks on regional infrastructure. That really is the one event that we are looking for, and which could determine a more dangerous path for stock markets, for risk assets in general,” Frederique Carrier, head of investment strategy for the British Isles and Asia at RBC Wealth Management, told CNBC’s Capital Connection on Wednesday.

“We know, looking at the acts of war since the 1940s, that those which create an oil crisis [and] a prolonged increase in oil prices are the ones which have a long-lasting impact on stock markets.”

She added that so far, there is “no indication” of that.

Immediately following the Iranian strikes, U.S. defense stocks hit record highs. Their European counterparts also ticked higher on Wednesday morning on the rising conflict risks, with Saab and BAE Systems adding 2.2%. Thales and Rheinmetall both rose more than 1.3%.

“Israelis now will respond, not only in kind, but do what is necessary to restore deterrence,” Zakheim added.

Australian mining tycoon Andrew Forrest, founder and executive chairman of Fortescue, says it is time for the world to walk away from the “proven fantasy” of net zero emissions by 2050 and to embrace “real zero” by 2040 instead.

Speaking to CNBC’s “Street Signs Europe” on Wednesday, Forrest called on business executives and politicians reluctant to make the changes necessary to avert the worst of what the climate crisis has in store to make way for leaders willing to take on the decarbonization challenge.

Fortescue, which is the world’s fourth-largest iron ore miner, has outlined plans to stop burning fossil fuels across its Australian iron ore operations by the end of the decade — and urged other hard-to-abate companies to follow suit.

“All those leaders who say to me, say to the world, say to their kids, ‘oh you know we can’t do it, my company can’t do it, I can’t do it, you don’t understand we can’t actually do it,’” Forrest said in an exclusive interview.

“What they are really saying is that you can’t do it. And I’m saying to each of those chief executives and those political leaders who use the words ‘I can’t,’ OK, what about you get off the stage and let on a young girl or wiser leader who can. Someone with a bit of ticker because the technology is there,” he continued.

“We know the world can go real zero 2040 and I’m reaching out to the business people and politicians across our planet to say it is time now to walk away from this proven fantasy [of] net zero 2050 and adopt real zero 2040,” Forrest said. “We can, we must, let’s do it.”

Net zero refers to the goal of achieving a state of balance between the carbon emitted into the atmosphere and the carbon removed from it.

More than 140 countries, including major polluters such as the U.S., India and the European Union, have adopted plans to reach net zero.

To meet the critically important warming threshold of 1.5 degrees Celsius, a target ascribed in the landmark Paris Agreement, global carbon emissions should reach net zero by around the middle of the century, according to the Energy and Climate Intelligence Unit non-profit.

For high-income nations, such as the U.S., it means reaching net zero by 2050 or earlier, while for low-income countries, it can mean achieving net zero by the 2050s or 2060s.

Scientists have repeatedly pushed for rapid reductions in greenhouse gas emissions to stop global average temperatures rising.

These calls have continued through an alarming run of temperature records that have put the planet firmly on course to notch its hottest year in human history in 2024.

Extreme temperatures are fueled by the climate crisis, the chief driver of which is the burning of fossil fuels.

Markets are in danger of being “whipsawed” by the combination of regional conflict in the Middle East and rising unemployment in the United States, says Stephen Roach, senior fellow at Yale Law School’s Paul Tsai China Center.

The conflict in the Middle East escalated on Tuesday, with Iran launching a ballistic missile attack on Israel after its killing of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.

Most Asian markets fell on Wednesday, tracking losses on Wall Street overnight, as investors fretted over rising tensions in the Middle East.

“The markets really will not know where to turn,” Roach said, adding that conflicts in the Middle East are adding to inflationary risks at a time when global central banks are starting to ease monetary policy.

“We are likely to see significant increases in volatility and markets that really are whipped back and forth dramatically,” Roach told CNBC’s “Squawk Box Asia” on Wednesday.

Iran is the third-largest producer among the Organization of the Petroleum Exporting Countries, pumping out nearly four million barrels of oil per day, according to the Energy Information Administration. Oil prices had jumped over 5% after the missile strike before tapering to a 2% climb.

The U.S. Federal Reserve projected cutting interest rates by another half point over the next two policy meetings this year, according to the central bank’s so-called dot plot from the September meeting.

Traders are also looking to U.S. payroll data on Friday for more indications on the state of the economy after the U.S. Federal Reserve’s jumbo rate cut in September. A higher-than-expected unemployment rate could prompt the Fed to accelerate the easing cycle to achieve a soft landing.

The unemployment rate in September is expected to come in at 4.2%, according to data of a Reuters poll on LSEG, unchanged from the August figure. The unemployment rate had jumped to near a three-year high of 4.3% in July, a dramatic rise from the five-decade low of 3.4% in April 2023.

Another factor that could affect the Fed’s rate-cutting pace is how long dockworkers’ strikes at the U.S. East and Gulf coasts will last, Tay said.

Dockworkers at ports stretching from Maine to Texas have gone on a large-scale strike over disputes on wages and threats from automation. It’s expected to disrupt global supply chains and has halted the flow of nearly half of the country’s ocean shipping, Reuters reported.

“Any disruption of the port, any work stoppage at the port is going to have a very significant economic consequence and very quickly,” said Peter Tirschwell of S&P Global Market Intelligence, warning that “the longer this goes on, the quicker the economic damage will mount.”