Oil to remain high as Middle East tensions threaten wider conflict

Tensions in the Middle East and the risk of a wider conflict will keep oil prices elevated, said Vivek Dhar, mining and commodities strategist at Commonwealth Bank of Australia.

Oil prices rose on Monday after the Israeli air force struck targets in Lebanon with more than 100 fighter jets before the Iran-backed group fired more than 320 rockets into Israel.

US West Texas Intermediate Crude Crude rose 0.75% to $75.39 a barrel, while Brent crude It rose 0.67% to $79.55.

The Iran-backed Hezbollah group said the strikes were in response to Israel's assassination of top military commander Fouad Shukr in Beirut last month. Reuters reported that Israel said its preemptive strikes were aimed at thwarting a larger attack by Hezbollah.

“While market expectations are that an Iranian attack will hurt Israel without sparking a wider regional conflict, Israel’s response will be just as significant,” Dar said. “Israel’s response could include an attack on Iran’s oil supplies and related infrastructure, which would put 3-4% of global oil supplies at risk.”

Cedric Chehab, managing director and global head of risk at research firm BMI, said Sunday's exchange of fire did not mean an “all-out war” was imminent.

Speaking to CNBC's “Squawk Box Asia,” Shehab said, “What Hezbollah wanted and what Iran wanted was to allow for deterrence basically. So, [to] “They practiced this deterrence, and they succeeded.”

He added that although there is a risk that the confrontation could turn into a wider conflict, there is still room for de-escalation.

“Israel and the Iranian leaders do not want the matter to get out of control and escalate… Don't forget that Iran has a new, untested president, and the idea is to put pressure on Israel, but not necessarily engage in a direct confrontation,” he added.

While Dar agreed with Shehab's view that Sunday's events were unlikely to be the catalyst for a full-scale war in the region, he noted that Iran has yet to respond to Israel following the assassination of Ismail Haniyeh, the head of Hamas's political bureau, in Tehran last month.

Dar added that the progress of the Gaza ceasefire talks will be an indication of how Iran, Hezbollah and Hamas interpret the events that took place over the weekend.

Early Monday, Reuters reported that No ceasefire agreement reached in talks Egyptian security sources told Reuters on Sunday that Hamas and Israel did not agree to the proposals presented by mediators in Cairo.

While the escalation is ostensibly damaging to the truce talks, the fact that Israel has managed to thwart Hezbollah “may force Iran and its proxies to recognize that Israel is in a position of strength, especially with U.S. support, making truce talks more palatable,” Dar added.

Brent crude futures are also expected to range between $75 and $85 a barrel in September, with further upside potential if hopes for a Gaza truce fade and the prospect of Iranian retaliation against Israel persists.

“More broadly, the risk of a wider conflict in the Middle East that permanently involves Iran poses a positive risk to our outlook.”