Oil prices seen higher but shock not yet in the cards

A crude oil tanker navigates the Suez Canal.
Dana Smillie | Bloomberg | Getty Images
A crude oil tanker navigates the Suez Canal.

The potential for U.S. intervention in Syria has sent jitters through the oil market and should keep prices high, but the event's ultimate impact will be determined by what happens after the military strike.

Any price escalation has also been mitigated by the fact that the U.S. has ramped up oil production, reducing reliance on imported crude from Africa and the Middle East and allowing that supply to reach other markets in Asia and Europe.

"I'd be surprised if Brent broke $120 on fear alone," said Trevor Houser, a partner at Rhodium Group who leads the firm's energy and natural resources work. "I wouldn't be surprised if it went to $120 immediately after a strike, and then I think the market would wait and see what kind of reaction that (the attack) elicited. First we're starting at a lower base. If we hadn't had the 2.3 million barrels a day in increased U.S. output over the past few years, baseline prices would be a lot higher. The market would be tighter, and the risk would be greater on the back of that."

(Read more: Investors: Be cautious as Syria looms)

Map of Syria.
Lonely Planet | Getty Images
Map of Syria.

WTI crude and Brent oil prices took another leap higher after the U.S. said Monday afternoon that the Syrian government attacked its own citizens with chemical weapons and that it must be held accountable. On Tuesday, U.S. officials told NBC News that the U.S. could hit Syria with three days of missile strikes, as early as Thursday in an attack intended more to send a message than topple President Bashar al-Assad's regime.

Syria is not a major oil producer, and it is not on a major oil route, but there are concerns that a U.S. strike would lead to some spillover effect in the region – or an act of retaliation, possibly on a Middle East oil facility, or as some other type of terror attack there or elsewhere. Cyber terrorism is also a concern, including from its ally Iran. On Tuesday, the New York Times website was inaccessible for some viewers, and a Twitter account for the Syrian Electronic Army claimed responsibility. Twitter also suffered a similar attack, and it said it was looking into it. The Syrian Electronic Army are pro al-Assad.

West Texas Intermediate crude closed up 3 percent at $109.01 per barrel, the highest close since February after the second biggest day of the year. Brent, the international benchmark, settled at $114.36 a barrel, up 3.3 percent.

Dennis Gartman, publisher of the Gartman Letter, said the pressure is on oil, particularly since the recent run up should continue to shake out shorts and could trigger margin calls.

(Read more: Stocks slide for second day amid Syria concerns)

"Our dog in the hunt died because of Eagle Ford, the Bakken and Marcellus," he said, pointing to well-known U.S. drilling areas. "The situation now is such that anybody whose short of oil the past several months finds themselves in a very uncomfortable position. Soon it becomes a game of margins."

Eurasia Group analysts say the most likely form of attack by the U.S. would be the launch of cruise missiles form U.S. warships in the Mediterranean. Experts say ending al-Assad's regime is not the objective of the U.S. and its Western allies, as that would leave the country and its weapons in the hands of a loosely knit group of rebels that include Al Qaeda.

"When you look at what the (Obama) Administration is looking to do, it's a very limited attack. It's not going to change the situation in the region right now. The really big issues there are Iraq and Libya where you have actual disruptive events going on. Libya is going to see continued instability," said Greg Priddy, director of global oil at Eurasia Group.

Priddy said the loss of oil from Libya and Iraq are significant but not enough to offset the trend of ample global supplies. Iran's exports have also been severely cut due to sanctions against it for its nuclear program. Strikes at Libyan oil facilities are responsible for the continuing lost volume of about 250,000 barrels per day from Libya, and in Iraq, the Kirkuk-Ceyhan pipeline is offline due to repeated attacks, cutting out 270,000 barrels per day. Priddy notes that Saudi Arabia boosted production to 9.8 million barrels per day in July and August.

(Read more: Allies draft plans for strikes against Syria)

He expects any strike on Syria to be narrow enough to avoid major disruptions in the oil market and not to cause a sustained breakout in prices.

Seasonal demand from refineries is dropping off, and at the same time non OPEC production in increasing, particularly from North America. Priddy noted that non OPEC production in July rose 570,000 barrels per day from June's level, with North America making up 280,000 barrels per day of that increase.

Government data on weekly U.S. oil inventories is released Wednesday at 10:30 a.m. ET and it is expected to show a build in supply. U.S. oil production is about 7.3 million barrels per day, the highest level since the early 1990s. At the same time, demand is falling with U.S. drivers using less and less gasoline as more modern and fuel efficient vehicles hit the roads.

"The fact you have all that new supply coming in means there's a lot more resilience in the system to deal with these smaller type shutdowns, like Libya and Iraq," said Priddy. "I think you would get some headline bump on the actual attack on Syria, but I think that will ebb pretty quickly afterwards as the limited ramifications become apparent."

(Read more: Crude roars on Syria; US oil ends above $109)

Paul Christopher, chief international strategist with Wells Fargo Advisors, said the possible U.S. action is not likely to have an impact on the global economy, and he remains positive on the U.S. economy and stock market. "We think probably the uncertainty is worth $5 to $8 a barrel over our target of $105 (for WTI)," he said. He later noted WTI could even reach as high as $115. "It's a trading opportunity perhaps, but we don't think this uncertainty is going to last a long time and what's more it's probably being magnified by other uncertainty."

"I think we're getting less of a pop because it's not sitting on the Sue Canal or the Gulf," he said.

Christopher agrees that retaliation is a factor that could prolong the period of higher prices. He said Iran could lead retaliatory strikes , using proxies in Lebanon, Iraq or from Palestinian territories. "We do not think Iran would seriously threaten oil supply lines, for fear of triggering an attack against itself, but retaliation could prolong the uncertainty and keep upward pressure on gold and oil prices and downward pressure on financial markets," he wrote in a note.

Traders have also pointed to Russian opposition to the intervention as a concern and say too much rhetoric could unsettle markets. Christopher said Russia's lack of support has made United Nations Security Council backing impossible and makes the situation more uncertain, as the U.S. forms a coalition. He said there is also the risk Russia could send its own military advisers to Syria.

(Read more: Gloom and doom? Consumers are upbeat about economy)

Russia's Foreign Ministry spokesman Alexander Lukashevich said launching a strike without UN approval would cause "new suffering and catastrophic consequences for other countries of the Middle East and Africa." Also on Tuesday, Russian deputy prime minister Dmitry Rogozin tweeted that Western countries are behaving like a "monkey with a grenade" in the Islamic world.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.