Burning Oil and Rising Risks: How the Israel-Iran Conflict is Heating Up Energy Markets and Defensive Assets

The Israel-Iran conflict has entered a new phase of escalation, with direct military strikes, retaliatory missile attacks, and geopolitical brinkmanship dominating headlines. As tensions peak, the ripple effects are already reshaping energy markets and creating opportunities for investors in defensive assets. This article examines how geopolitical risk premiums are distorting energy valuations and identifies sectors poised to benefit from the volatility.

The Geopolitical Risk Premium in Energy Markets

The current conflict mirrors historical patterns where Middle East instability drives oil prices higher. Since mid-May .2025, Brent crude has surged over 15%, breaching $90 per barrel amid fears of supply disruptions. The chart underscores how geopolitical risks amplify volatility.

Why Oil Spikes?
- Supply Disruption Risks: Attacks on Iranian energy infrastructure, like the Shahran oil depot and South Pars gas field, directly reduce export capacity. Even a temporary blockage of the Strait of Hormuz—through which 20% of global oil flows—could push prices above $100.
- Strategic Reserves: Governments and corporations are stockpiling crude preemptively, further tightening supplies.

The geopolitical risk premium now embedded in oil prices reflects investor fear of worst-case scenarios. This premium isn't just theoretical: integrated energy majors like ExxonMobil (XOM) and Chevron (CVX) are benefiting from higher prices, but their stocks remain constrained by geopolitical uncertainty.

Defensive Assets: The Safe Harbor in Chaos

When conflict flares, investors turn to assets that thrive in volatility or hedge against inflation. Here's where to look:

1. Gold and Volatility ETFs
   Gold has risen 8% since April 2025, approaching record highs. The shows its inverse correlation with stability. Volatility ETFs like VIXY also surge as markets price in uncertainty.

2. Defense Sector Equities
   Companies providing missile defense systems and cybersecurity solutions are critical.

3. Lockheed Martin (LMT): A leader in air defense systems, its stock has outperformed the S&P 500 by 20% YTD amid rising military budgets.

4. Cyberark (CYBR): As cyberattacks increase—particularly targeting energy infrastructure—demand for its identity-security solutions is soaring.

5. Energy Infrastructure Plays
   Firms like Kinder Morgan (KMI) and Enbridge (ENB) benefit from long-term energy demand but face risks from supply chain disruptions. Their steady dividends and inflation-hedging properties make them defensive picks.

Strategic Opportunities and Risks

• Go Long on Defense and Cybersecurity: Allocate 10-15% of a portfolio to LMT, CYBR, and similar names. Their valuations remain attractive relative to growth prospects.
• Hedge with Gold and Volatility: Use gold ETFs (GLD) or inverse volatility funds to offset energy-sector risks.
• Avoid Overexposure to Middle East Energy Stocks: Companies with direct exposure to regional infrastructure (e.g., Maersk) face elevated operational and insurance costs.

The Bottom Line

The Israel-Iran conflict is a geopolitical wildcard with no quick resolution. While energy markets will remain volatile, investors can capitalize by:
1. Embracing defensive assets to hedge against inflation and disruption.
2. Targeting sectors that benefit from heightened military spending and cybersecurity demand.
3. Maintaining flexibility to adjust as diplomatic breakthroughs or further escalation alter the risk calculus.

The next few months will test investor resolve. Those who pair risk mitigation with strategic bets on conflict-driven sectors may find opportunity in the ashes of geopolitical turmoil.