Oil Volatility and Geopolitical Risks: Navigating the Israel-Iran Conflict

The Middle East's simmering tensions reached a boiling point in early June 2025, as Israel and Iran engaged in a series of escalating military exchanges. From drone strikes on Israeli infrastructure to retaliatory missile attacks targeting Iran's energy assets, the conflict has injected unprecedented volatility into global oil markets. Investors now face a critical question: How do you position a portfolio to withstand geopolitical risk while capitalizing on energy market dynamics?

The Catalyst: June's Military Escalation

The conflict's immediate trigger came on June 1, 2025, when Iranian drones struck Israeli infrastructure, including a critical oil refinery in Haifa. Israel retaliated with a wave of strikes targeting Iranian nuclear facilities, ballistic missile sites, and energy infrastructure, including the South Pars gas field and an oil depot near Tehran.

The market's reaction was swift. By June 13, , while Brent crude surged 7% to $74.23 per barrel—the largest single-day gains since Russia's invasion of Ukraine in 2022. By June 15, prices climbed further, with WTI hitting $75.67 and Brent reaching $77.90 per barrel.

Why Oil Prices Remain Elevated

The conflict's impact extends beyond immediate supply disruptions. Analysts emphasize three key factors sustaining a floor under oil prices:

1. Strait of Hormuz Threats: With one-fifth of global oil transiting the Strait of Hormuz, Iran's warning to “close the strait” has sent shockwaves through markets. While full closure is unlikely due to U.S. naval presence, localized attacks on tankers or mining could still disrupt flows. Goldman Sachs estimates a full closure could push prices above $100 per barrel.

2. Risk Premiums: By mid-June, analysts noted a $5–$7 per barrel “risk premium” baked into oil prices, reflecting fears of further escalation. Even contained hostilities may keep premiums elevated as long as tensions persist.

3. OPEC+ Dynamics: While OPEC+ has begun easing production cuts, any Iranian supply disruption—whether intentional or accidental—could tighten markets. Iraq and Saudi Arabia's ability to offset losses is constrained by capacity limits.

Investment Strategies for Energy Volatility

Investors must balance exposure to energy markets with protection against geopolitical tail risks. Here's how to position a portfolio:

1. Hedge with WTI Futures

For long-term investors holding energy stocks or ETFs, . For example, purchasing a futures contract at $75 per barrel locks in a selling price, mitigating losses if prices rise further.

2. Allocate to Energy Equities with Geopolitical Exposure

Companies with Middle East operations or exposure to strategic energy infrastructure stand to benefit from sustained high oil prices. Consider:
- ExxonMobil (XOM): A leader in oil production and refining with diversified global assets.
- Halliburton (HAL): Positioned to benefit from higher demand for oilfield services if producers ramp up activity.
- CNOOC (CEO): A Chinese energy giant with access to Iranian markets and Gulf supply routes.

3. Leverage Inverse Oil ETFs for Volatility

Inverse ETFs like the ProShares UltraShort Oil & Gas (SGO) or the VelocityShares 3x Inverse Crude ETN (DNO) allow investors to profit from short-term declines in oil prices during periods of extreme volatility. Use these sparingly, as they are best for tactical trades rather than long-term holdings.

4. Diversify with Energy-Linked Options

Options strategies, such as buying put options on energy ETFs (e.g., XLE), provide downside protection while leaving upside potential intact. A put option on the Energy Select Sector SPDR Fund (XLE) could limit losses if prices drop due to a sudden de-escalation or OPEC+ oversupply.

The Bottom Line

The Israel-Iran conflict has created a “new normal” for oil markets: higher baseline prices with periodic spikes driven by geopolitical triggers. While a full-scale war or Strait of Hormuz closure could push prices to $100+, even contained tensions are likely to keep a floor of $70–$75 per barrel in place.

Investors should prioritize diversification and hedging. Allocate to energy equities with geopolitical resilience, use futures to protect existing holdings, and employ inverse ETFs tactically to exploit volatility. As history shows, markets often overreact to short-term events—but the Middle East's strategic importance ensures oil will remain a geopolitical lightning rod for years to come.

Stay vigilant, but stay invested.