All-out war, or measured retaliation?

The region has been on edge, awaiting an Israeli reprisal after Iran sent more than 300 missiles and drones into the Jewish state at the weekend – the first ever direct Iranian attack into Israeli territory – which was largely intercepted by Israel’s air defenses and caused no deaths. Tehran said the strikes were in retaliation for Israel’s bombing of an Iranian diplomatic compound on April 1 that killed two senior Iranian generals, among others. 

Markets immediately reacted to the latest attacks, with oil prices jumping more than 3% in early Asian trading and U.S. stock futures falling on fears of wider Middle East war. 

Locked in a decades-long regional proxy war, Israel-Iran tensions have soared over the course of the bloody Israel-Hamas war in Gaza, now in its seventh month. Iranian-backed militant groups including Lebanon’s Hezbollah and Yemen’s Houthis have attacked Israeli territory and shipping assets, while Israel carries out assassinations of Iranian leaders and its proxy fighters around the region. 

But a full-blown conventional war would be devastating to both sides and highly destabilizing for the Middle East. 

What happens next may now depend on Iran’s response – and then Israel’s response after that, and so on. Are these tit-for-tat blows between Israel and Iran clear evidence of all-out war, or carefully calibrated retaliation strikes?

The two countries, who are among the most heavily-armed in the Middle East, have vowed forceful and decisive responses to their adversaries’ strikes, while other leaders in the region call for de-escalation.

Israel on Sunday vowed to “exact a price” from Iran, and Israeli Prime Minister Benjamin Netanyahu on Wednesday said that only his country would decide when and how it would respond to Iran’s drone and missile strikes — dismissing calls by Western allies for restraint.

The scale of the Israeli response also likely depends on whether it has U.S. backing. And while Washington has pledged an “ironclad” commitment to supporting Israel, President Joe Biden has also reportedly told Netanyahu that the U.S. will not take part in any offensive military operations against Iran.

Iranian President Ebrahim Raisi, meanwhile, warned that even the “tiniest” incursion into its borders would trigger a “massive and harsh” response.

Clay Seigle, director of global oil service at Rapidan Energy Group, believes the line into a full-on war has now been crossed. “With Israel’s apparent strikes on Iran today, retaliating for Iran’s attack on Israel last Sunday, we now have a direct nation-on-nation hot war,” he told CNBC’s “Capital Connection” Friday.

“The ‘shadow war’ chapter has come to an end.”

Former Israeli Prime Minister Ehud Olmert agreed, telling CNBC’s Dan Murphy that hostilities have escalated to a new level. “I think this has been a decision of Iran to respond to what they argued was the Israeli elimination of Iranian generals in Damascus … they declared war on Israel, there is no question about it,” Olmert said Tuesday.

Not everyone agrees that the line into wider war has been crossed, however.

Military analysts point out the apparent limited nature of Israel’s attack on Iran, as well as Tehran’s strikes on Israel overnight Saturday that were telegraphed beforehand with several hours of warning, allowing Israel’s military and population to be well-prepared with air defenses and shelters.

“Iranian attack was designed to be easily intercepted and reset the bar on deterrence,” Ian Bremmer, CEO of political risk firm Eurasia Group, wrote in a post on X about Tehran’s unprecedented strikes on Israel.

And Michael Singh, the former senior director for Middle Eastern affairs at the National Security Council, told the Wall Street Journal that Iran’s actions represented a “slow-moving, thoroughly telegraphed, and ultimately unsuccessful retaliation.”

As for Israel’s countermove this morning, some analysts are expressing the same reactions.

“I think at this point, headlines suggest to us that this was an escalatory strike — but if we’re being honest, [considering] the menu of retaliatory strikes that Israel had at its disposal following the weekend’s Iranian attack on Israeli soil — this is not the most escalatory path they could have taken,” Rob Casey, partner and senior analyst at Signum Global Advisors, told CNBC’s “Capital Connection” on Friday.

Israel’s attack was “very visible, it’s a kinetic attack on Iranian soil … but that being said, the information that we have now suggests there were no casualties or at least no casualties to this point, and there was no significant damage to Iranian nuclear facilities” in the targeted area, Casey said.

Indeed, the International Atomic Energy Agency confirmed there was no damage to Iran’s nuclear sites.

While it’s difficult at this point to assess whether the Israeli strike was “proportionate” to Iran’s attack over the weekend, both appear not to have taken any lives or caused significant damage, he noted.

“It does not seem to be this significantly escalatory strike that some had feared.”

Within hours of the Israeli strikes, risk assets were already on their way back down, with international oil benchmark Brent crude turning lower for the session after a brief spike.

Restrained or not, any miscalculation could tip the adversaries into far more serious conflict, given all the different actors involved.

The question now is: At what point does the cycle of escalatory moves stop?

“Who, with the ball in their court, decides not to respond?” Casey asked.

“Iran responded over the weekend, Israel has responded in the past hours — so the ball is back in Iran’s court. Now what’s going to happen tomorrow or the day after that or the day after that, its still really hard to know.”

— CNBC’s Ying Shan contributed to this report.