Israel retaliation may target Iran oil infrastructure, boosting prices further, Wall Street analysts say

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 Tuesday on CNBC's "The Exchange" 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 Col. 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 Wednesday morning on CNBC's "Squawk Box."

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