Geopolitical Blind Spots: Why Energy Stocks Are the Contrarian Play in Middle East Tensions

The escalating conflict between Israel and Iran has sent global markets into a state of dissonance: U.S. equities rally on hopes of a swift resolution, while oil prices dip despite the risk of supply disruptions. This divergence reflects a dangerous underestimation of prolonged geopolitical instability—and presents a rare opportunity for contrarian investors.

The Market's Optimism, Reality's Risks

As of June 16, 2025, the S&P 500 had clawed back most of its June 14 losses, buoyed by hopes of a negotiated truce. Yet the conflict shows no sign of abating. Israel's strikes on Iranian nuclear facilities and Iran's retaliatory missile attacks on civilian targets highlight the fragility of any ceasefire. Meanwhile, oil prices have retreated to below $75 per barrel, down nearly 6% from their June 13 peak, as traders bet on a “war premium” unwinding.

This disconnect is a contrarian's dream. Markets are pricing in a short-term resolution, but history shows that Middle East conflicts often drag on. The 2020 U.S.-Iran tensions saw oil prices spike over 30% in a week, only to stabilize once markets realized the conflict was contained. Today's situation is far more volatile, with Iran threatening to close the Strait of Hormuz—a move that could halt 20% of global oil exports.

Why Energy Equities Are Mispriced

The energy sector offers a compelling contrarian play. While crude futures have dipped, energy equities—particularly U.S. producers—remain undervalued relative to their resilience in past conflicts.

Take Chevron (CVX), which has underperformed oil prices since early 2024. Despite its robust balance sheet and exposure to shale production, the stock trades at just 12x forward earnings—a discount to its five-year average of 15x. Similarly, Exxon Mobil (XOM) and Occidental Petroleum (OXY) offer leveraged exposure to oil prices, with production costs far below current breakeven points.

The case for energy stocks is twofold:
1. Geopolitical Tailwind: Even a partial disruption to Iranian exports (2.5 million barrels/day) would tighten global markets, lifting oil prices.
2. Fed Policy Dividend: The Federal Reserve's likely pause on rate hikes—now priced at 97% probability—eases the pressure on equities while energy companies benefit from inflation-linked pricing.

Short Crude Futures: Betting Against Truce Fantasies

On the flip side, crude oil futures present a compelling short opportunity. Markets are pricing in a “war premium” of about $10–$15 per barrel, assuming a quick resolution. But what if the conflict escalates?

The risks are asymmetric. If a truce emerges, oil prices could drop further as traders unwind speculative long positions. If tensions worsen—say, if Iran blocks the Strait of Hormuz—prices could spike above $100, but such a scenario would likely trigger coordinated global oil releases, capping gains.

Defense Stocks: A Hedge Against Escalation

While energy equities are the core contrarian play, investors should pair exposure with defensive positions in defense contractors. Companies like Raytheon Technologies (RTX) and Lockheed Martin (LMT) are poised to benefit from increased U.S. military spending and Middle East arms sales.

RTX's recent 15% Q2 rally—driven by Patriot missile contracts—suggests these stocks can outperform even in sideways markets.

The Bottom Line: Position for Prolonged Tensions

Markets are pricing in a best-case scenario, but history warns against complacency. Investors who buy energy equities now and short crude futures position themselves to profit from either a resolution (lower oil prices, higher equities) or escalation (soaring energy stocks). Defense stocks add a buffer against the latter.

The key takeaway? Geopolitical risks are rarely “priced in” until they're upon us. For now, the market's optimism is a contrarian's ally.

Nick Timiraos is a pseudonym. The author is a seasoned financial analyst specializing in macroeconomic and geopolitical trends.