A drone strike that killed three US soldiers in the Middle East has escalated regional conflicts and irritated oil markets (CL=F, BZ=F). Prosper Trading Academy CEO Scott Bauer and Eurasia Group Middle East Practice Head Ayham Kamel analyze the potential fallout on Yahoo Finance Live. Kamel warns, "This is not going to be a comfortable few weeks at all."

Kamel believes the attack's near-term impact on oil supply will be limited, saying it's "contained". However, he expects the Biden administration will likely undertake some military response targeting militias in Iraq and Syria. Broader action on Iran seems unlikely, with Kamel citing "reluctance" to stoke inflation and considerations around "Biden's own position domestically." He believes Biden will aim to "be careful" and restrict long-term escalation.

Meanwhile, Bauer asserts "the bottom line is oil prices are on their heels right now" amid weak demand. Though geopolitical tensions could move prices, the impact appears muted as risks are already priced in. Bauer sees crude oil in a "bearish" macro position and is enthusiastic about the current volatility for traders, suggesting investors look to sell.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

RACHELLE AKUFFO: Joining us now we have Scott Bauer, Prosper Trading Academy CEO, and Ayham Kamel, Eurasia Group Middle East Practice head. So I want to have you first set the scene here in terms of what this means in terms of oil supply and demand now that we see that this is escalating.

AYHAM KAMEL: I think in the first instance, there will be no impact-- direct impact on oil supply in the region. I think more likely than not, the Biden administration is creating a calibrated military response that appears very loud in terms of targeting militias in Iraq and Syria to rebuild that lost US deterrence on the military front. But I think the appetite to move into something direct that hits Iran or hits Iranian export, it's still low for now.

So I think there's reluctance to do something in terms of tinkering with oil supplies that might impact inflation expectations, and over the long term, even Biden's own position domestically. So more likely than not, we're looking at a contained conflict with a higher risk that it expands. For now, the Biden administration is probably going to be careful.

AKIKO FUJITA: Scott, let me get your reaction to what Adam said. I mean, do you agree that potential disruption to oil markets pretty much contained there and that the broader concern as it relates to the energy space really is about the demand picture, largely coming out of China too?

SCOTT BAUER: No doubt about it, and I wholeheartedly agree. I do think even now with oil prices down today, there's probably about $3 to $4 of risk premium already built in because of tensions in the Middle East, especially with what happened over the weekend. But you can see the reaction today, it really goes to what you guys were just talking about. That the response is probably going to be very tempered. And the bottom line is, oil prices are on their heels right now.

And it is all because of demand or lack of it, should we say. We do have OPEC coming out next week, which given everything that's going on, given the tensions in the Middle East, that could disrupt the marketplace. But I really don't think so. So to me as a trader, I actually love this extra volatility. And though much of the marketplace is looking at this as a buy the dip because of the escalated tensions out there, I actually look at this as selling what we call selling the rip or selling a move higher.

Because the overall macro picture of crude is absolutely on the bearish side. Obviously, things can escalate very quickly. You can always have a big pop, if God forbid, something really tragic happens here. So if you're trading, if you're trading with options or just with futures, you always need to use a star. But I would look to sell any pop that we get in the near term.

RACHELLE AKUFFO: So, Ayham, in terms of the response that we tend to see from OPEC as we saw with the Russia Ukraine crisis in the Middle here, what response are you expecting from OPEC at the upcoming meeting?

AYHAM KAMEL: Well, I think Saudi Arabia, who really exactly is the engine of OPEC plus, will be looking at a very comfortable price range. I think for the Saudis, OPEC plus in general, any range of oil prices and the '80s is completely acceptable. There's not likely to be a big reaction to put additional barrels on the market in the current environment. One exception to that would be if we saw an escalation of the regional conflict and it begins to impact supplies.

Then the Saudis would consider to work more actively with OPEC plus to try to create some form of relief over there. But currently, given just the demand picture that we've discussed on the show and the supply risks as they are, the Saudis will be cautious in terms of putting additional. Or taking barrels or putting additional barrels on the market sale stable status quo works for now, particularly given the spending commitments on Vision 2030.

And I think that the Saudis can deliver on that. One key point I would just add, that things-- yes, there is an intention by the Biden administration to calibrate its response. But military conflicts and regional crises have the tendency to create their own dynamics. Where we are today is not a very comfortable place in terms of risks in general. I do expect additional tit for tat military strikes and confrontation between the US and the militias in Iraq and Syria. This is not going to be a comfortable couple of weeks at all.