Geopolitical Risk Premium: How Middle East Tensions Are Fueling Oil Volatility—and How to Play It

The Iran-Israel conflict has sent global oil markets into a tailspin, with Brent crude prices spiking over 4% in early June 2025 amid fears of supply disruptions. This surge, driven by geopolitical risk premiums embedded in energy prices, underscores the fragility of a market already balancing tight inventories and volatile demand. As tensions escalate, investors must navigate a landscape where every missile strike or diplomatic maneuver could redefine the risk premium—and the bottom line.

The Geopolitical Premium in Action

Geopolitical risk premiums are not new to oil markets. From the 1970s OPEC embargoes to the 2020 Saudi Aramco attack, conflicts in the Middle East have historically inflated prices by $10–$30 per barrel above fundamentals. Today's $5–$7 premium on Brent crude reflects fears of a full-blown crisis in the Strait of Hormuz, a 21-mile waterway through which 20% of global oil flows. Analysts at Rystad Energy estimate prices could stabilize near $75–$80 if the U.S. brokers a ceasefire, but a closure of the Strait—a worst-case scenario—could push prices to $120, according to Deutsche Bank.

Why the Strait of Hormuz Matters

The Strait's chokepoint status makes it a geopolitical tinderbox. Iran's threats to block it, coupled with electronic interference near its ports, have already triggered higher insurance costs for tankers. While the strait remains open, the mere risk of disruption is enough to keep premiums elevated. Iran's oil production (3.4 million barrels per day) and exports (1.7 million barrels per day) further amplify this volatility. Even a partial shutdown could tighten global supplies, especially as OPEC+ plans to increase output by 411,000 barrels per day in July—a move that may prove insufficient if conflict escalates.

Expert Forecasts: How Long Will the Premium Last?

• Short-Term (3–6 months): Most analysts see prices capped below $80 if the U.S. mitigates escalation. However, Rystad warns that $90–$100 could materialize if attacks damage critical infrastructure like the South Pars Gas Field or Israel's Leviathan/Karish fields.
• Long-Term (2026): The U.S. Energy Information Administration predicts prices will dip to $61 by year-end and $59 in 2026 as inventories grow. JP Morgan's base case aligns with this, but its “risk scenario” sees prices spiking to $130 if military action blocks the Strait.

Investment Strategies: Play the Premium or Hedge the Risk

1. Go Long on Energy ETFs
   Investors betting on sustained premiums can leverage instruments like the United States Oil Fund (USO) or 2x Long Crude Oil ETN (UCO), which amplify price movements. However, these are volatile; a sudden de-escalation could lead to sharp declines.

1. Hedge with Inverse ETFs or Options
   For those wary of prolonged conflict, inverse ETFs like the ProShares UltraShort Oil & Gas (SGO) or short-dated put options on oil futures can protect portfolios from downside risk.

2. Target Infrastructure Plays
   Companies with exposure to LNG export terminals (e.g., Cheniere Energy's LNG facilities) or strategic storage assets (e.g., Buckeye Partners) may benefit from rerouted shipments if the Strait is compromised.

3. Diversify with Defensive Energy Stocks
   Firms with stable cash flows and low geopolitical exposure, such as Chevron (CVX) or Equinor (EQNR), offer a safer entry into the sector.

4. Monitor Technical Levels
   Traders should watch the $74.70 50-day moving average for Brent—a key support/resistance level. A breach below this could trigger a drop to $70, while a sustained breakout could target $82. Historical backtests confirm this level's significance: from 2020 to 2025, a strategy buying USO when its price closed above this threshold and holding until it closed below generated an 82.89% annualized return with a risk-adjusted Sharpe ratio of 0.22, underscoring its effectiveness in capturing momentum during similar volatility episodes.

Backtest the performance of United States Oil Fund (USO) when its price closes above the $74.70 50-day moving average and hold until it closes below this level, from 2020 to 2025.

The Bottom Line

The Iran-Israel conflict has turned the Strait of Hormuz into the world's most expensive insurance policy. While the current $75–$80 price range reflects a balanced market, investors must prepare for extremes. Aggressive players can capitalize on the premium through leveraged ETFs, while cautious portfolios should hedge with inverse instruments or infrastructure stocks. As always, geopolitical risks are unpredictable—but the markets are pricing in the worst. Stay nimble, and let the data guide your decisions.

Jeanna Smialek is a pseudonym.