Wall Street analysts predict that Israel's retaliation against Iran could increase oil prices even more, targeting Iranian oil infrastructure.

• The Middle East conflict increases the risk of oil supply disruptions, according to geopolitical and crude market analysts.
• In response to Iran's ballistic missile attack, Israel may target its oil facilities.
• If the Strait of Hormuz is not disrupted, OPEC's spare capacity can cushion the market and prevent prices from rising.

This week, the oil market experienced a sudden increase in crude prices of more than 5% following a large-scale ballistic missile attack by Iran against Israel, which disrupted sleepy trading.

Since the start of the year, traders have largely dismissed the possibility of a supply disruption in the Middle East. However, in September, bearish sentiment took over the market as investors became increasingly concerned about a surplus next year due to weakening demand in China and increased production from OPEC+.

The escalating conflict in the Middle East has reached a critical stage with Israel threatening a "severe" response to Iran's attack. According to geopolitical and oil market analysts, the Israeli government, led by Prime Minister Benjamin Netanyahu, may target Iran's oil infrastructure as a retaliatory measure.

"Helima Croft, head of global commodity strategy at RBC Capital Markets, stated on CNBC's "The Exchange" that there has been complacency about the war and emphasized the need to consider a scenario where Iranian oil supplies are at risk."

Israel may consider attacking Iran's nuclear facilities, but those structures are fortified, making them challenging to destroy, according to retired U.S. Army Colonel Jack Jacobs. Such an attack could prompt Iran to retaliate with a larger ballistic missile barrage that would be challenging to counter, he added.

According to CNBC's "Squawk Box," on Wednesday morning, Jacobs stated that an attack on oil facilities is more likely and what is currently being discussed.

According to RBC Capital Markets, U.S. intelligence has previously pointed out the potential threat to Iran's Kharg Island oil terminals, which are responsible for 90% of the country's crude exports and are currently operating at a five-year high of over 3 million barrels per day, as stated by Croft.

In the next turn of this retaliation spiral, oil may be involved, either through the degradation of Iran's oil capacity or Iran's proxies attacking oil and gas shipping from the Persian Gulf, according to Piper Sandler analysts in a Wednesday research note.

The effect on the oil market would depend on the extent of the damage to Iranian crude exports and how the situation progresses, according to Bob McNally, president of Rapidan Energy. If Iran's oil exports of approximately 1.8 million bpd were disrupted, oil prices could increase by at least $5 per barrel, McNally predicted.

If Iran responds with threats, it could lead to an escalation that could increase oil prices by $10 per barrel, McNally said.

"According to Andy Critchlow, EMEA head of news at S&P Global Commodity Insights, oil markets are currently facing dangerous times due to the high level of geopolitical risk."

With 5.6 million bpd of spare capacity, OPEC can quickly increase production, and Saudi Arabia is eager to bring as much of its oil back to the market as possible, according to Critchlow.

The analyst believes that any disruption to Iranian oil supplies to the international market can be compensated for by spare OPEC capacity and idled oil at the moment.

If there is a major disruption in the Persian Gulf, McNally stated that the oil won't be of much use, as the spare capacity is mostly trapped within the Strait of Hormuz.