War upends the oil trade. How it could play out.

Oil prices spiked 14% in the immediate aftermath of the attacks, before giving back some of those gains. Brent crude, the international benchmark oil price, rose 7% on Friday to $74.23 per barrel.

Based on recent history, oil’s rise might seem fleeting. For most of the past three years—since the early days of the Russia-Ukraine war—geopolitical events haven’t had a lasting impact on oil prices. The Israel-Hamas war and continuing violence in Ukraine have barely impacted the oil market, because they didn’t dramatically affect supply and demand.

But the price shock from the Israel-Iran conflict could last weeks because major oil infrastructure could be in the line of fire. “It is something that seems like prices could remain elevated for some time,” says Rob Haworth, who oversees investment strategy for U.S. Bank Asset Management Group.

If the conflict grows substantially, analysts have predicted oil prices could surge over $100 per barrel, and perhaps as high as $120.

The extent of the price-move depends on how the war escalates. Israel didn’t directly strike Iran’s oil infrastructure on Friday, but some analysts expect Israel to hit those facilities if the war continues. Iran, for its part, is in a position to disrupt oil shipments in the region, which could cause prices to spike even more.

Iran produces about 3.2 million barrels of oil a day, and exports between 1.5 million and two million barrels of it. That is a significant piece of the 103 million barrels of global oil production, but not enough to completely disrupt the market. Israel isn’t a major player, historically pumping less than 10,000 barrels a day.

Israel could disrupt production if it hits Kharg Island in the Persian Gulf, which houses much of Iran’s oil export infrastructure. Iran, in turn, has plenty of ways to respond that could affect the oil market even more. Iran and the military groups it supports, including the Houthis in Yemen, could create much wider disarray.

After the Israel-Hamas war began in 2023, the Houthis attacked ships in the Red Sea—some of those carried energy products—causing a brief spike in the price of oil. But the Red Sea doesn’t transport that much oil.

The most important waterway is the Persian Gulf, which sits between Iran and Saudi Arabia.

Iran and its proxies could block the Strait of Hormuz, a narrow waterway that connects the Persian Gulf to the Gulf of Oman and which offers access to markets all over the world. Thirty percent of the world’s seaborne oil trade flows through it. China, which buys more of Iran’s oil than any other country, is particularly dependent on supplies that come through the strait.

Financial firm Lazard thinks oil prices would surge above $120 if the strait is blocked, and the U.S. would probably have to get involved to unblock it. Lazard thinks a short disruption to the strait is possible but considers an extended blockade “highly unlikely due to catastrophic internal and international consequences and the ability of the U.S. Navy to intervene to open up the strait.”

Given its location and military capabilities, Iran could impact the market in other ways. Two Saudi Arabian oil facilities were damaged in military strikes in 2019, severely curtailing oil production, and Iran was believed to be behind the attacks. Tensions between Saudi Arabia and Iran have eased since then, but Iran could widen the conflict again by hitting Saudi facilities.

J.P. Morgan analyst Natasha Kaneva thinks a wider Middle East conflict would cause an oil shock that could take prices over $120. Based on how oil traders reacted to the latest escalation of the war, she thinks the market is implying a 17% chance of a much more severe impact.

Such a dramatic price spike feels like a long shot. The overall oil supply-demand picture is still bearish, with global oil supply set to outpace demand this year because of expected production hikes from members of OPEC. “We expect, absent a wider war, today’s rise in prices will likely prove to be a sell-the-news event,” wrote Morningstar analyst Allen Good.

The conflict, and its higher oil prices, isn’t a reason for investors to pile into energy stocks, but it’s a reminder of why they can be important pieces of a portfolio. Oil stocks jumped on Friday, even as the broader market and some Big Tech names fell. Exxon Mobil was up 2.2%, and Occidental Petroleum rose 3.8%.

“When tech stalls out, there’s a natural rotation to energy companies,” says Jay Hatfield, portfolio manager of the Infrastructure Capital Equity Income exchange-traded fund. “They’re actually pretty good hedges.” Hatfield’s fund owns Exxon and Chevron, which he thinks offer investors exposure to the industry without as much risk as smaller names.

Oil’s gains may well fizzle out eventually. But this war appears to be far from over, and oil is right in the middle of it.

Write to Avi Salzman at [email protected]