Despite concerns about Middle East oil supply, oil prices have not significantly increased.

• Despite the anticipation of a significant increase in oil prices, the recent rally has been relatively tame, with crude futures only gaining approximately 8% week-to-date.
• The reason crude prices have not increased further is due to the oil market's shortage, according to some analysts. Energy Aspects' Amrita Sen stated on CNBC that the current levels of record shorts are unprecedented.
• Bjarne Schieldrop of SEB characterized the recent increase in oil prices as "minimal," despite the "dire consequences" that could arise in the Middle East.

Since the beginning of the week, oil prices have increased by more than $5 per barrel due to growing concerns about a potential Israeli attack on Iran's energy infrastructure.

Despite the rally, which has propelled crude futures to gains of around 8% week-to-date, many market observers are surprised by its subdued nature given the significant stakes involved.

The possibility of a conflict in the Middle East disrupting oil flows from key exporting regions has raised concerns among energy analysts. Specifically, the fallout could impact Iran, a member of OPEC and a major player in the global oil market. If Israel targets Iran's oil facilities, it could result in a significant loss of up to 4% of global supply.

An increase in Iranian oil output could cause oil prices to decrease by $20 per barrel, according to Goldman Sachs. However, SEB has predicted that crude futures could reach over $200 per barrel in an extreme situation.

Some analysts believe that the oil market is short, which is why crude prices have not risen further. This strategy involves profiting from a decline in the market value of an asset.

Not only in oil, but also in equities, there is a very large short position, which is causing concern among investors. Jeff Currie, chief strategy officer of energy pathways at Carlyle, explained this to CNBC's "Squawk Box Europe" on Wednesday. The reason for this concern is the anticipation of a big oil supply glut next year.

"Today's situation is starkly different, with low inventories, a backwardated curve, and middling demand. However, China's stimulus package and OPEC's production cuts provide some relief," Currie stated.

The near-term outlook is positive due to the front of the curve being strong, but the back end is being weighed down by fears of a big oil supply glut and potential conflict in the Middle East that could take out some energy facilities.

When the futures price of oil is below the spot price, the market is in backwardation. The opposite scenario is referred to as contango.

'The market is so short'

Energy Aspects' founder and director of research, Amrita Sen, shared Currie's perspective.

"We've never seen these levels of record shorts before," Sen said on CNBC's "Squawk Box Europe" on Thursday.

According to Sen, oil traders seem to have adopted a bearish stance regarding the possibility that China's stimulus efforts will not succeed in reviving confidence in its economy, which is the world's second-largest. Furthermore, market participants anticipate that OPEC and its non-OPEC allies will increase oil production later in the year.

Sen stated that the market has recently become bearish, but if it continues in this direction, we could see a rapid increase in value, potentially reaching above $80.

On Friday, December expiry crude futures traded 1.5% higher at $78.81 a barrel, while U.S. West Texas Intermediate futures rose 1.6% to $74.86.

Fundamentals 'anything but encouraging'

On Thursday, oil prices surged over 5% after U.S. President Joe Biden made comments about a possible Israeli response to Iran's ballistic missile attack earlier in the week.

Biden stated that the U.S. is considering whether to support an Israeli strike on Iranian oil facilities, but he believes it would be a little premature. He also added that nothing will happen today.

CNBC has reached out to the White House for further comment.

On Thursday, via email, Tamas Varga, an analyst at oil broker PVM, stated that the oil market was factoring in some risk premium due to geopolitical concerns.

The reason for oil's stability, weakening equities, and a strong dollar is due to fears that will be alleviated unless there is a significant impact on oil supply from the region or traffic through the Strait of Hormuz.

The Strait of Hormuz, a narrow waterway located between Iran and Oman, is of great strategic importance as it connects crude producers in the Middle East with major markets worldwide.

Varga stated that if this scenario occurs, the underlying fundamentals will once again be the driving force, but they are anything but encouraging.

On Tuesday, Israeli Prime Minister Benjamin Netanyahu vowed to retaliate against Iran with force after Tehran launched over 180 ballistic missiles at Israel. Netanyahu stated that Iran would be held accountable for what he considered a grave error.

During a visit to Qatar on Thursday, Iranian President Masoud Pezeshkian stated that his country was not seeking war with Israel. He cautioned, however, that Tehran would respond forcefully to any additional Israeli actions.

Despite the high stakes, oil prices remained surprisingly stable, according to Bjarne Schieldrop, the chief commodities analyst at SEB.

"While short covering may be a factor, the price rally is surprisingly weak given the potential scenarios in the Middle East," he said on CNBC's "Street Signs Europe" on Thursday.

Brent crude prices had mostly fluctuated between $80 to $85 for approximately 18 months, before dropping below $70 in September. Schieldrop characterized the recent increase in oil prices as "minimal," considering the "severe consequences" that could arise in the Middle East.

— CNBC's Spencer Kimball contributed to this report.