This is all related to the holiness of God, which is one of His attributes. It is your second option, the law of God's holiness forces the situation where a sacrifice was necessary.
>Why necessity of sacrifice?
Why did people in the pre-Christ era need to perform sacrifices? Because God instructed it, but why did He instruct it?
Because men sin, and God's holiness does not permit the presence of sin
<You are not a God who takes pleasure in evil; with you the wicked cannot dwell (Psalm 5:4)
>Why animal sacrice?
In my opinion, it could have been just as well that God only asked for grain and wine offerings, but animal sacrifice makes the connection that sin brings death, and it was a most valuable resource to the ancients. It also typologically relates to Christ.
Remember that many of the sacrifices served a practial purpose too. Priests would eat the remains of certain sacrifices, and the feasts were similarly sacrificial.
>Why a certain group of middle easterners?
OT Israel was just the nation that God graciously condescended to. This was not a guarantee of eternal salvation for being an Israelite, nor was eternal salvation exclusive to members of that tribe.
>Why human sacrifice of Christ?
Man's sin could only be finally paid for by sacrifice of man.
<For since by man came death, by man came also the resurrection of the dead (1 Cor 15:21)
>Why virgin birth?
To be a man, Jesus had to be born. Mary had to be a virgin again because of God's holiness, and because a normal pregnancy would not produce the son of God, but the son of Joseph if he supplied the seed.
I hope you can see that all the pieces come together by logical (and theological) necessity