Following a week of Israeli strikes on Iranian nuclear facilities and other targets, the U.S. entered the conflict on Saturday, deploying B-2 bombers to strike Iran’s Fordow, Natanz and Isfahan nuclear facilities with Massive Ordnance Penetrator (MOP) bombs. The situation is evolving rapidly, and the ultimate consequences remain uncertain, requiring investors to stay alert as new developments arise. The full extent of the impact on Iran’s nuclear program is still being assessed, and Iranian officials may attempt to minimize perceived damage or adjust their strategic approach.
The Markets Are Mainly Subdued—For Now
The capital markets’ initial response to the first Israeli strikes was relatively subdued last week. From June 13 - 20, the MSCI ACWI fell less than 2%, with interest rates and major currency moves largely stable. However, with the U.S. now directly involved, concerns about further escalation and the potential impacts on energy markets have risen. Market interpretation could range from fears of a growth setback (drawing parallels to the Gulf War), to worries over higher inflation due to rising oil prices, or even to cautious optimism if diplomatic efforts lead Iran to moderate its nuclear ambitions (though such an outcome remains distant).
Oil and commodity markets, by contrast, responded sharply. Over the past week, Brent crude surged more than 12%, with daily price swings ranking among the most significant since the onset of the Russia-Ukraine conflict. These moves reflect widespread anxiety about disruptions to one of the world’s most critical energy corridors. With U.S. military action intensifying the situation, investors are increasingly pricing in a premium as they seek to protect themselves against near-term supply shocks.
Middle East Conflict: Key Market Observations
- Escalation: U.S. and Israeli strikes—including B-2 airstrikes on Iran’s Fordow, Natanz, and Isfahan nuclear facilities—have significantly heightened geopolitical tensions and market risk.
- Market Reactions: Initial capital market moves were muted last week, but oil prices have surged over 12% on supply fears.
- Critical Chokepoint: The Strait of Hormuz (~20% of global oil flows) remains at risk. Disruption is not binary—the U.S. 5th Fleet’s presence makes a full closure unlikely, but even limited Iranian actions (missile strikes, mines, cyberattacks, or jamming) could meaningfully impact tanker traffic and energy flows.
- Retaliation Risks: Iran may use indirect tactics (shipping harassment, sabotage) to create volatility without shutting down oil flows. Its asymmetric and proxy capabilities, demonstrated in the 2019 attacks, remain a clear and present danger to regional infrastructure.
- Regime Change Uncertainty: If regime change is part of the solution, history from Libya, Iraq, and Venezuela shows prolonged and unpredictable oil supply disruptions are likely.
- Demand & Inventories: Oil demand is strong, seasonal consumption is rising, and inventories are low. Spare capacity is concentrated in Gulf states that are themselves under threat; further disruptions could quickly exhaust this buffer. Strategic petroleum reserve (SPR) releases may help but act slowly; markets are likely to move defensively and price in worst-case scenarios ahead of policy action.
- Unknown Unknowns: The situation remains highly unpredictable; investors should not assume that recent developments mark the end of risks.
- Investment Implications: Diversification—especially with commodities like gold and energy—remains critical in this era of frequent and unpredictable shocks.
Gauging Potential Supply Shocks
With U.S. military action intensifying the situation, investors are increasingly pricing in a premium as they seek to protect themselves against near-term supply shocks. Iran remains a major oil exporter, shipping around 1.5 million barrels per day, mainly to Asia and especially China. We believe any significant loss of supply from the broader Gulf region could have catastrophic consequences for the global economy and financial markets.
Iran has multiple potential avenues for retaliation. It could try to restrict Middle Eastern energy supplies directly (by targeting infrastructure in neighboring countries) or indirectly (via allied groups across the region).
The Strait of Hormuz, through which about 20% of global oil and a significant share of liquid natural gas (LNG) pass each day, is a particular point of concern. While the presence of the U.S. Navy’s 5th Fleet in Bahrain makes a full and prolonged shutdown unlikely, experts note that even limited Iranian actions—missile strikes, mining, cyber interference or jamming—could disrupt tanker traffic, drive up insurance costs and deter shipping without an outright closure.
Recent reports of Iranian interference with vessel transponders have already prompted warnings from maritime authorities. Most of the energy passing through Hormuz is destined for Asia—especially China, which is a key Iranian partner. Disrupting these flows would not only harm Iran’s economic interests but also put its own shipments at risk, as Iranian tankers outside the Gulf could be exposed to reprisals or operational challenges. This risk is most acute if Iranian leaders, isolated and facing potential regime change, act out of desperation.
In our view, Iran will more likely pursue strategies that create ongoing uncertainty—such as harassment of shipping, sabotage and escalating costs—without fully severing supply lines.
Whether acting directly or through proxies, such as militias in Iraq and Yemen or groups like the Houthis, we believe Iran retains significant capacity to threaten vital energy infrastructure. Oilfields, refineries, and export terminals throughout the Gulf region—including major facilities such as Saudi Arabia’s Abqaiq processing plant and its Ras Tanura export terminal, as well as Kuwait’s Mina al-Ahmadi refinery—are within range of missile attacks, sabotage or cyber operations.
This threat is not theoretical, in our view: Recent incidents, such as the 2019 strikes on tankers off Fujairah and the drone and missile attack on Saudi Aramco’s Abqaiq and Khurais facilities, have demonstrated how even limited actions can remove millions of barrels per day from global markets and disrupt supply chains. In the gas sector, Europe’s increased storage and LNG diversification offer some buffer, but any serious disruption to Qatari LNG flows from facilities like Ras Laffan would have worldwide ripple effects, forcing both Europe and Asia to compete for available cargoes. While Iran’s recent diplomatic outreach to Saudi Arabia and the UAE may temper some risks, we believe it cannot fully shield regional energy assets from potential retaliation by Iranian proxies.
Potential Longer-Term Impacts
While these immediate threats could remove supply from the market in the short term, the prospect of political upheaval in Iran raises the risk of deeper, more prolonged disruptions. If regime change in Iran becomes part of the resolution, history sends a cautionary signal to energy markets.
For example, the removals of Muammar Gaddafi in Libya and Saddam Hussein in Iraq led to steep, lasting declines in oil output, as instability and unclear leadership kept millions of barrels off the market. Venezuela also provides a related lesson: Since Hugo Chávez’s death, political and economic turmoil have prevented a return to previous production levels. Notably, earlier supply shocks were absorbed by robust growth in U.S. shale production, a dynamic less likely to repeat as the sector matures. These historical examples highlight that even if hostilities subside, regime change can result in prolonged, unpredictable supply disruptions. For Iran, any transition could leave oil production and exports uncertain until a stable government emerges.
Given these multiple threats to regional supply—from both acute attacks and the risk of prolonged instability—the ability of OPEC+ to buffer the market becomes crucial. The group has recently managed production to support price stability, including unwinding voluntary cuts to balance global supply and encourage compliance among members. However, if Iranian barrels are lost, we believe regional spare capacity could be exhausted quickly. Most of this buffer—currently estimated at 3–4 million barrels per day, though likely less after recent increases—is concentrated in Gulf states that themselves are exposed to elevated risk. As a result, any further disruptions in the region could swiftly overwhelm available spare capacity and drive prices sharply higher.
Meanwhile, oil demand is strong. Tariff risks are fading; the summer travel and driving season is underway; and inventories in many areas are below typical levels. In light of these supply and demand pressures, governments may turn to additional measures, such as releasing oil from strategic reserves, to help contain prices. However, these actions take time to impact the market, and traders are likely to maintain defensive positions, preparing for further volatility.
Diversification Remains Paramount
In addition to these market and supply concerns, investors must also consider the broader geopolitical risks related to Iran’s nuclear program. Another layer of uncertainty now surrounds Iran’s potential nuclear response. Tehran may seek to minimize the perceived damage to its program; shift operations to undisclosed facilities; or reconsider its commitment to international agreements, including a possible withdrawal from the Non-Proliferation Treaty. Such moves would not only add further complexity and instability to the region, but could also prolong the conflict and increase the risk of wider escalation.
Diplomacy remains a possible path forward, and a peaceful resolution would be our hope. Yet hope alone is not an investment strategy: Investors must prepare for a world where shocks can arise suddenly and from multiple directions. Maintaining a diversified portfolio—especially with allocations to commodities like gold and energy—remains a prudent approach to managing ongoing uncertainty.
