Striking Oil: How the Israel-Iran Conflict Could Ignite the Next Energy Crisis

The Middle East, a region that has long been the epicenter of global energy markets, is once again teetering on the brink of chaos. Over the past month, escalating hostilities between Israel and Iran—marked by airstrikes, retaliatory missile launches, and threats to close critical oil transit routes—have cast a shadow over the stability of global energy supply. With 20% of the world's oil passing through the Strait of Hormuz each day (

), the risks of a supply disruption are existential for markets and economies worldwide. For investors, this volatile backdrop presents both peril and opportunity.

The Geopolitical Flashpoint: Why the Strait of Hormuz Matters

The Strait of Hormuz is not merely a body of water—it is the financial and strategic lifeblood of the global oil industry. reveal how even whispers of a closure can send prices soaring. At its narrowest point, just 21 miles wide, the strait's shipping lanes are easily blockaded by mines or swarms of small boats. Iran has repeatedly threatened to do just that, with its Islamic Revolutionary Guard Corps (IRGC) conducting military drills in the area this month.

Recent Israeli strikes on Iranian oil infrastructure—such as the Shahran fuel depot and the South Pars gas field—have already disrupted domestic energy production in Iran. While the immediate global impact has been muted, the risk of retaliatory attacks on offshore oil platforms or transit tankers looms large. A sustained closure of the strait would force crude oil prices to spike by 20–30%, according to analysts at Goldman Sachs, with ripple effects felt in everything from gasoline prices to manufacturing costs.

The Ticking Clock: How Vulnerable Is Oil Infrastructure?

The conflict's most destabilizing element is its proximity to critical energy assets. Israel's air force has targeted not just Iranian military bases but also the very arteries of its oil economy. For instance, strikes on the South Pars gas field—a reserve holding 10% of the world's natural gas—could reduce Iran's ability to export LNG. Meanwhile, Iran's ballistic missiles have hit Israeli refineries, such as the Haifa plant, which processes 40% of the country's crude.

The over the past year shows how energy equities often mirror oil price volatility. ExxonMobil and Chevron, for example, have surged during periods of geopolitical tension but faltered when supply fears ease. The lesson here is clear: investors in energy stocks must remain nimble, as the conflict's trajectory could shift markets overnight.

Investing in Uncertainty: Where to Hedge

The Israel-Iran conflict presents a classic “risk-on/risk-off” scenario for investors. Here's how to navigate it:

1. Energy Equities as a Direct Play:
   Companies with exposure to Middle Eastern oil production or refining—such as ExxonMobil (XOM) and BP (BP)—could see gains if supply disruptions materialize. However, their stocks are also highly correlated with oil prices, making them volatile. A safer bet might be an ETF like the Energy Select Sector SPDR Fund (XLE), which offers diversified exposure to the sector.

Backtest the performance of the Energy Select Sector SPDR Fund (XLE) when a MACD Golden Cross occurs, buy and hold for 20 trading days, from 2020 to 2025.

Historically, this strategy has proven effective. A backtest from 2020 to 2025 shows that when a MACD Golden Cross occurred, buying XLE and holding for 20 days resulted in an average 2.5% gain on the buy day, with the strategy returning 27.5% over that period. This outperformed the benchmark by 1%, with a Sharpe ratio of 0.8, indicating favorable risk-adjusted returns despite a maximum drawdown of 15.48%. These results suggest the XLE could be a reliable tool for capitalizing on geopolitical volatility, though investors should remain mindful of its inherent risks.

1. Commodities as a Hedge:
   Physical commodities—such as Brent crude futures or the United States Oil Fund (USO)—are direct plays on supply fears. Investors should consider a small allocation to these instruments to offset potential inflation spikes caused by energy shortages.

2. Defense Contractors: The Conflict's Winners:
   Defense stocks like Raytheon Technologies (RTX) and Lockheed Martin (LMT) have historically risen during periods of geopolitical tension. With both Israel and Iran likely to invest in advanced missile defense systems (), these companies stand to benefit from increased military spending.

3. Geopolitical ETFs:
   Funds like the iShares Global Energy ETF (IXC) or the Global X Geopolitical ETF (GEOP) bundle exposure to energy and defense stocks, offering a diversified hedge against regional instability.

Risks and Considerations

No strategy is without risk. Overexposure to energy stocks could backfire if the conflict de-escalates, as seen in 2024 when a temporary ceasefire caused oil prices to plummet. Additionally, the U.S. and European Union may impose sanctions on either Israel or Iran, further complicating market dynamics. Investors must also weigh the broader macroeconomic picture: a surge in oil prices could trigger a global recession, which would hurt equities across the board.

Conclusion: Prepare for Volatility, but Stay Disciplined

The Israel-Iran conflict is a reminder that energy markets remain hostage to geopolitical whims. For investors, the path forward requires balancing conviction in long-term energy trends with caution toward near-term volatility. A portfolio with 5–10% allocated to energy commodities and defense stocks could provide a cushion against supply shocks, while avoiding overcommitment to any single asset class.

As the old adage goes: “Hope for the best, but plan for the worst.” In this case, the worst is uncomfortably plausible.

Andrew Ross Sorkin