Geopolitical Tensions and Energy Markets: Navigating Risk with Defensive Plays and Commodity Exposure

The U.S. military strikes on Iran's nuclear facilities on June 19, 2025—codenamed "Operation Midnight Hammer"—have ignited a new phase of geopolitical volatility, with profound implications for global energy markets. While crude prices have risen modestly so far (

), the risk of a full-blown supply disruption looms large. For investors, this environment demands a strategic reallocation of portfolios toward defensive equities and energy commodities to weather the storm while capitalizing on potential opportunities.

The Geopolitical Risk Landscape

The immediate catalyst for market anxiety is Iran's threat to retaliate against the U.S. and Israel. With Iran controlling the Strait of Hormuz—a chokepoint for 20% of global oil—the risk of supply chain disruptions is existential for energy markets. Analysts at RBC warn that Iran could mine the strait or disrupt tanker transponders, potentially adding $4–$6 to oil prices (). JPMorgan's Natasha Kaneva estimates a 70% chance of prices breaching $100 if Iranian retaliation escalates, while a 30% risk exists of a $120+ spike akin to 1979's triple-oil-price crisis.

Beyond oil, the strikes have reignited fears of broader regional conflict. The U.S. and Israel now face retaliatory cyberattacks, lone-wolf terrorism, and potential Iranian-backed militant actions in Lebanon and Gaza. This creates a “double whammy” for markets: energy volatility and a drag on global equities from rising geopolitical uncertainty.

Opportunities in Energy Commodities

The energy sector is the clearest beneficiary of this tension, particularly for investors willing to accept short-term volatility. Key plays include:

1. Oil & Gas ETFs: The Energy Select Sector SPDR Fund (XLE) and United States Oil Fund (USO) offer exposure to energy majors like ExxonMobil (XOM) and Chevron (CVX), which could see earnings lift from higher oil prices.

2. Natural Gas: While oil dominates headlines, natural gas could also surge if Iranian retaliation disrupts LNG exports. The U.S. is a net exporter, so companies like Cheniere Energy (LNG) or EQT Corp (EQT) could benefit.

3. Uranium: With Iran's nuclear facilities targeted, global scrutiny of nuclear programs may intensify. Uranium miners like Cameco (CCJ) or KazAtomProm could see renewed interest if nations double down on nuclear energy as a geopolitical hedge.

Defensive Equities: A Hedge Against Market Volatility

While energy commodities offer upside, investors must also shield portfolios from broader market declines. Geopolitical conflicts historically correlate with equity market pullbacks, especially in cyclicals like industrials and tech. Defensive sectors—utilities, healthcare, and consumer staples—are less sensitive to economic slowdowns and offer steady dividends.

• Utilities: Regulated firms like NextEra Energy (NEE) or Dominion Energy (D) offer stable cash flows and low beta.
• Healthcare: Defensive stocks such as Johnson & Johnson (JNJ) or Eli Lilly (LLY) have historically outperformed during uncertainty.
• Consumer Staples: Procter & Gamble (PG) or Coca-Cola (KO) provide exposure to recession-resistant demand.

Portfolio Reallocation Strategy

A balanced approach is critical. Allocate 20–30% of equity exposure to defensive sectors for stability, while dedicating 10–15% to energy commodities to capture upside from supply risks. Monitor these key indicators:

• Strait of Hormuz Traffic: A sudden drop in tanker transits could signal disruption.
• Oil Inventory Reports: Weekly EIA data will indicate whether supply is tightening.
• Geopolitical Sentiment: Track U.S.-Iran diplomatic talks and Iranian retaliation efforts via news feeds.

Risks and Exit Strategies

The trade's downside includes a rapid de-escalation, which could trigger a sharp sell-off in energy commodities. Investors should set stop-losses at $65 for oil () and consider scaling back energy exposure if tensions cool. Additionally, the Federal Reserve's response to stagflation—potential rate cuts—could provide a tailwind for equities, easing some defensive pressure.

Backtest the performance of the S&P 500 when 'buy condition' is triggered on Federal Reserve rate decision dates indicating a rate cut, and 'hold for 20 trading days', from 2020 to 2025.

Conclusion

The U.S.-Iran conflict has reset the geopolitical risk calculus for 2025. While energy commodities present a high-reward opportunity, investors must anchor their portfolios in defensive equities to mitigate broader market volatility. Monitor the Strait of Hormuz and diplomatic channels closely—this is a fluid situation where agility will separate winners from losers. In Josh's view, a 20/10 split between defensive stocks and energy plays strikes the optimal balance between protection and profit potential. Stay vigilant, but don't let fear paralyze your portfolio.