Geopolitical Risks and Energy Markets: Navigating Oil Volatility Amid U.S. Policy Uncertainty

The Israel-Iran conflict has thrust geopolitical tensions into the heart of global energy markets, with U.S. policy delays creating both opportunities and risks for investors. While the temporary easing of oil prices presents a window to deploy capital into energy equities, prolonged uncertainty could fuel inflationary pressures and disrupt portfolios. This analysis explores how investors can capitalize on near-term volatility while hedging against the specter of Middle East escalation.

The Oil Market: A Delicate Balancing Act

The U.S. decision to delay direct military involvement in the Israel-Iran conflict has tempered immediate fears of a price spike, but oil remains vulnerable to geopolitical whiplash. As of June 19, 2025,

crude prices had retreated slightly from June 18's highs, with WTI settling at $74.95 per barrel and Brent at $76.27—a 1.5% drop from the week's peak. However, prices remain 11% higher than at the start of the month, reflecting lingering fears over supply disruptions.

The critical chokepoint, the Strait of Hormuz, handles 20% of global oil flows. Analysts at JPMorgan warn that its closure could push prices toward $120 per barrel, while prolonged conflict or Iranian regime change could lock in sustained higher prices. For now, the U.S. delay has created a “wait-and-see” environment, offering investors a chance to build positions in energy stocks without the immediate threat of a shock.

Energy Equities: A Strategic Entry Point

The energy sector's valuation offers compelling value amid the volatility. ExxonMobil (XOM) and Chevron (CVX) are prime candidates for investors seeking exposure to stable, high-margin energy producers. Both companies have demonstrated resilience in prior crises, with strong balance sheets and dividend yields of 4.5% and 6%, respectively.

Their stocks have underperformed the broader market in recent months, trading at a 14% discount to fair value as of May 2025. This undervaluation, combined with the likelihood of sustained oil prices above $70 per barrel, makes them attractive buys for long-term investors.

Safe-Haven Assets: Gold's Dual Role

Geopolitical risk has traditionally boosted demand for gold, which acts as both an inflation hedge and a store of value during market instability. The U.S. dollar's recent decline—driven by fiscal deficits and Treasury issuance—has further buoyed gold's appeal. A weaker dollar reduces the cost of gold for non-U.S. investors, amplifying demand.

While gold's short-term performance may be volatile, its role as a portfolio diversifier is critical. Investors should consider allocating 5–10% of their portfolios to physical gold or gold ETFs (e.g., GLD) to offset energy-related inflation risks.

Treasury Yields and the Dollar: Key Indicators for Portfolio Adjustments

The U.S. Treasury yield curve and the dollar's trajectory are critical to navigating this environment. As of June 13, 2025, the 10-year Treasury yield stood at 4.41%, while the 2-year yield was 3.96%. A flattening yield curve signals slowing growth, which could reduce energy demand in the long term.

A sustained breach of 4.8% in the 10-year yield would likely pressure equity valuations, including energy stocks. Meanwhile, the USD Index, which has fallen to its lowest level since mid-2023, reflects fiscal policy risks but supports commodities like oil and gold.

Investment Strategy: Balance Opportunism with Caution

1. Energy Equities: Use the current dip to build positions in Exxon and Chevron. Their dividends and operational resilience make them durable holdings.
2. Gold: Allocate to gold to hedge against inflation and geopolitical tail risks.
3. Monitor Yields: If the 10-year yield exceeds 4.8%, reduce equity exposure and increase cash or short-term bonds.
4. Avoid Overexposure: Limit energy stock allocations to 10–15% of portfolios, as prolonged conflict could destabilize broader markets.

Conclusion

The Israel-Iran conflict has created a precarious yet navigable landscape for investors. While the U.S. delay in military action offers a respite for oil prices, the region's volatility remains a wildcard. By pairing energy equities with gold and staying vigilant on Treasury yields and the dollar, investors can capitalize on near-term opportunities while mitigating risks. The path forward demands agility—staying invested in energy while anchoring portfolios in safety.

Final Note: Stay attuned to geopolitical developments and macroeconomic indicators. This is a high-reward, high-risk environment where disciplined portfolio management is key.