The Geopolitical Risk Premium in Oil: How the Israel-Iran Conflict is Shaping Energy Markets

The Israel-Iran conflict has reached a boiling point, with recent military strikes and threats to global oil chokepoints like the Strait of Hormuz introducing unprecedented volatility into energy markets. Investors must now parse the geopolitical risk premium embedded in oil prices—and identify strategic commodity plays that could profit from—or hedge against—this instability.

The Current Stakes: A Chokepoint Under Pressure

In June 2025, Israel's Operation Rising Lion targeted Iran's nuclear and military infrastructure, including the Natanz facility and the Bushehr Province's South Pars Gas Field. While these strikes disrupted Iran's domestic energy supply, they avoided crippling oil export terminals like Kharg Island. Despite this, markets initially reacted with fear: . However, prices retreated as it became clear that Iran's oil exports—accounting for 1.8 million barrels per day—remained largely intact.

The bigger risk lies in Iran's threat to close the Strait of Hormuz, through which 20 million barrels of oil flow daily. While analysts dismiss an outright closure as “suicidal” due to inevitable military retaliation, even the perception of risk has already altered shipping behavior. , as some firms reroute tankers to avoid the strait entirely.

The Geopolitical Risk Premium: What's Priced In?

The term “risk premium” refers to the excess return investors demand for holding an asset exposed to political or economic instability. In oil markets, this premium is now reflected in prices that factor in the likelihood of supply disruptions. Historically, such premiums have emerged during events like the Iran-Iraq War (1980–1988) and the 1990 Gulf War, when oil prices spiked due to fears of chokepoint blockages.

Today, the premium appears modest compared to past crises. suggests markets have not yet fully priced in a worst-case scenario (e.g., a Strait closure). But this could change rapidly: If Iran escalates attacks on shipping lanes or export terminals, prices could surge toward $100/bbl or higher. Conversely, a diplomatic breakthrough could see prices drop below $70/bbl.

Strategic Commodity Plays: Where to Position

1. Long Energy Exposure:
   Investors bullish on the risk premium can take long positions in oil ETFs like the United States Oil Fund (USO) or energy stocks with Middle East exposure. Companies like —which benefit from higher crude prices—could see gains if geopolitical fears persist.

2. Shipping Sector Opportunism:
   Shipping firms like , which have seen freight rates rise due to rerouting, may offer short-term gains. However, prolonged conflict could lead to increased insurance costs and volatility, making this a high-risk play.

3. Natural Gas Plays:
   European natural gas prices, already sensitive to supply disruptions, . Investors might consider natural gas ETFs (e.g., UNG) or utilities with gas-fired power plants, which profit from rising prices.

4. Hedging via Options:
   For cautious investors, buying put options on oil ETFs (e.g., USO) could protect against a sudden geopolitical shock that drives prices higher. Alternatively, inverse ETFs like the ProShares UltraShort Oil & Gas (DUG) might benefit if markets overreact to de-escalation.

Risks to Consider

• Strait of Hormuz Stability: If Iran avoids blocking the strait, the risk premium could unwind, leading to a price drop.
• OPEC+ Responses: The cartel might boost production to offset any supply loss, mitigating price spikes.
• U.S. Shale Flexibility: American shale producers could ramp up output quickly if prices hit $90+/bbl, capping gains.

Conclusion: Monitor the Strait, but Stay Cautiously Optimistic

The Israel-Iran conflict has introduced a persistent geopolitical risk premium into energy markets, but it's not yet pricing in a worst-case scenario. Investors should:
- Stay long oil if geopolitical tensions remain unresolved, particularly if Iran's threats to the Strait escalate.
- Avoid overcommitting to shipping stocks without a clear pathway to conflict resolution.
- Keep an eye on OPEC+ and U.S. shale—their actions could dilute the premium's impact.

In the end, the Strait of Hormuz remains the key variable. As long as it stays open, the risk premium—and oil prices—will remain constrained. But a single misstep could ignite a firestorm.