Strategic Allocation in the Shadow of the Strait: How Middle East Tensions are Fueling Energy and Defense Plays

The Strait of Hormuz, a 21-nautical-mile bottleneck through which 35% of the world's seaborne crude oil flows, has become the epicenter of a geopolitical tempest. Recent Israeli strikes on Iranian nuclear facilities—killing senior military leaders and destabilizing Tehran's strategic calculus—have reignited fears of supply disruptions.

. The resulting volatility in oil prices and defense spending offers investors a clear roadmap: allocate to energy equities and defense contractors while hedging with commodities. Here's how to position your portfolio.

The Energy Sector: Betting on Geopolitical Risk Premia

The June 13 Israeli airstrikes sent Brent crude soaring 8% to $78.50, a preview of what a full-blown conflict might bring. Analysts warn that a closure of the Strait—a scenario BIMCO's Jakob Larsen calls “inevitable” in an escalation—could push prices above $100. Even partial disruptions, such as attacks on tankers or pipeline sabotage, would tighten supply.

For investors, this creates a multi-pronged opportunity:
1. Oil Majors: Companies like ExxonMobil (XOM) and Chevron (CVX) benefit from higher crude prices. Their balance sheets, strengthened by years of disciplined capital allocation, are primed to capitalize on a supply crunch.
2. Refiners and Logistics: Companies such as Phillips 66 (PSX) and Buckeye Partners (BPL) gain from higher throughput margins as geopolitical premiums boost refining demand.
3. Service Providers: Schlumberger (SLB) and Halliburton (HAL) could see a rebound in upstream spending as producers hedge against supply risks.

The chart below shows how geopolitical events have amplified price swings. The next spike could be larger—and more prolonged—if tensions escalate further.

Defense Contractors: Profiting from the Arms Race

The Middle East's military buildup is a self-reinforcing cycle. Iran's retaliation—including drone strikes, cyberattacks, and proxy wars—will drive U.S. and Gulf Arab states to accelerate defense spending. Israel's own military modernization, paired with regional alliances, is fueling demand for advanced systems.

Top plays here include:
- Lockheed Martin (LMT): A leader in missile defense systems, including the Iron Dome and Patriot batteries critical to countering Iranian drones.
- Raytheon Technologies (RTX): Benefiting from sales of air defense systems to Gulf states and NATO allies.
- General Dynamics (GD): Positioned to supply advanced combat vehicles and cybersecurity solutions.

The XARX ETF, up 25% since late 2023, outpaces broader markets—a trend likely to continue as defense budgets grow.

Hedging: Commodities as an Insurance Policy

While energy equities and defense stocks offer growth, investors must hedge against the tail risks of a full-blown crisis. Two instruments stand out:
1. Oil Futures: Direct exposure to WTI or Brent via ETFs like USO or BNO provides a pure play on supply disruptions.
2. Gold: A geopolitical “safe haven,” with SPDR Gold Shares (GLD) offering diversification against inflation and systemic risk.

Risks and Considerations

• Overheating Markets: Valuations for defense stocks and oil majors are already stretched. Use pullbacks to enter.
• Diplomatic De-escalation: A sudden rapprochement—unlikely but possible—could trigger a sharp selloff.
• Global Recession: Elevated oil prices could exacerbate inflation, leading to central bank hawkishness and equity headwinds.

Final Take: Allocate, Diversify, and Monitor

The Israel-Iran conflict isn't going away anytime soon. Investors should:
1. Increase energy sector exposure to 15-20% of a portfolio, focusing on balance-sheet strength and dividend yields.
2. Add 5-10% to defense equities, particularly companies with multi-year contracts.
3. Hedge with 5-10% in commodities, using futures or ETFs to offset downside risks.

The Strait of Hormuz isn't just a chokepoint for oil—it's a chokepoint for global growth. Positioning portfolios to navigate its risks could be the defining trade of 2025.