The events of this weekend have fundamentally altered the geopolitical landscape of the Middle East. A joint US and Israeli military operation has struck Iran's leadership, military infrastructure, and key energy assets. Supreme Leader Ali Khamenei is confirmed dead. Explosions have been reported at or near Kharg Island, Iran's primary oil export terminal. Transit through the Strait of Hormuz, the most important energy chokepoint in the world, has not formally closed but has slowed substantially, with commercial vessels rerouting or pausing in the face of uncertainty.
The scale of what is at stake cannot be overstated. Iran produces roughly 3.4 million barrels per day of crude and condensate and exports about 1.7 million barrels per day, overwhelmingly to China. But the real exposure is the Strait itself. Approximately 20 million barrels per day of oil and nearly a fifth of global LNG supply transit through Hormuz. If the Strait remains impaired for any meaningful duration, the price consequences become nonlinear. A partial slowdown lasting a week or two can be absorbed through storage drawdowns and delayed cargoes. A full or near-full closure lasting a month or more would require demand destruction at levels that could push crude well into triple digits and European natural gas prices toward or above the crisis levels seen in 2022. The relationship between disruption length and price is not proportional — it accelerates. Every additional week of closure compounds the problem because storage buffers deplete, refiner production cuts cascade, and replacement cargoes from outside the region take time to mobilize.
Paths Forward From Here
There are several paths forward from here, and we expect that markets will remain volatile.
The first path is a rapid de-escalation. The US declares mission accomplished, having eliminated Khamenei and degraded Iran's nuclear and missile capabilities. Iran's remaining leadership, including the Islamic Revolutionary Guard Corps (IRGC), decides that further escalation risks total destruction of the state's remaining infrastructure. Hormuz traffic normalizes within days. Oil spikes but then retraces, possibly settling modestly above pre-crisis levels. This is the scenario current consensus appears to favor, but it requires assumptions about rational actors operating under extraordinary stress.
The second path is a prolonged, but contained standoff, possibly lasting four to five weeks. Iran could retaliate through proxies or asymmetric actions in the Gulf, the Red Sea, or against regional U.S. bases. Hormuz remains partially impaired, with the U.S. Navy potentially providing limited tanker escorts. Oil stays elevated in a wide and volatile range, with every headline driving sharp moves in both directions. OPEC spare capacity of roughly 3 to 4 million barrels per day exists on paper, but much of it sits in Saudi Arabia and the UAE, whose exports themselves depend on Hormuz remaining open. Pipeline bypass capacity is limited to roughly 4 to 5 million barrels per day, a fraction of what flows through the Strait. We expect oil prices to remain well above pre-crisis levels throughout this scenario.
The third path is regime change followed by fragmentation. This is the one that deserves more attention than it is getting. Khamenei is dead, but the IRGC remains entrenched and Iran's opposition is deeply fragmented. History offers uncomfortable precedents. Libya produced 1.7 million barrels per day before its 2011 intervention. Output collapsed to almost nothing and has never fully recovered. Syria's production never meaningfully recovered as competing factions contested control of oil infrastructure. Iraq post-2003 took six years to return to pre-war levels and required a full military occupation. Air power alone has rarely produced stable regime change. A power vacuum in Iran could mean not just short-term disruption but a structural loss of Iranian barrels for years. While the Strait may reopen, in the long run even a partial loss of 1 to 2 million barrels per day from Iran, sustained over years rather than weeks, would meaningfully tighten global balances. While prices may normalize from crisis levels, this scenario can keep oil curves in backwardation, meaning futures-based oil investing continues to earn a positive roll yield as markets stay structurally scarce.
The fourth path is an extended regional war. Iran targets Saudi or Emirati energy infrastructure directly, or mining and sabotage operations make Hormuz uninsurable for commercial shipping. In this scenario, the disruption extends well beyond Iranian barrels, and the price response moves into territory that forces demand rationing globally. We believe this remains a tail risk, but not a negligible one, and it is the scenario where both oil and LNG markets face the most acute pressure given Gulf nations’ near-total dependence on Hormuz for their exports.
Expect Two-Way Volatility
In the near term, we expect prices to rise from here, but investors should expect persistent two-way volatility. Every report of diplomatic contact, every statement from remaining Iranian leadership, every decision about naval escorts or Strategic Petroleum Reserve (SPR) releases will move markets, potentially sharply. The de-escalation newsflow will be just as powerful as the escalation newsflow, and positioning around headlines is a difficult game.
That said, there are meaningful supply buffers that limit the worst-case outcomes. China holds record strategic petroleum reserves of roughly 465 million barrels, which can cushion the loss of Iranian cargoes to its refiners. The U.S. SPR, while diminished, still holds over 400 million barrels. OPEC members outside the conflict zone can bring some spare capacity to market. But these are finite resources, and they buy time, not resolution. As recently as 2010–2013, oil ranged around $100 per barrel, and economies were able to absorb elevated prices as the disinflationary forces of that era outweighed energy-driven inflation. Today, advances in AI and productivity gains may offset the inflationary impact of geopolitics, but these remain more aspirational than proven, and their timelines are uncertain.
As geopolitical realities shift, in our opinion the immediate takeaway for portfolios is that commodities are doing exactly what they are supposed to do in moments like this: providing diversification when traditional assets struggle to price discontinuous geopolitical risk. But our view extends well beyond the current crisis. Even if the geopolitical premium fades quickly, the fundamental case for broad-based commodity exposure remains intact. Oil markets were already tightening on demand growth and disciplined supply. Gold continues to attract both public and private buyers as a store of value and a hedge against exactly this type of geopolitical fracture; we see meaningful room for that demand to accelerate in the aftermath of these events. Copper and other industrial metals continue to price long-term scarcity driven by electrification and infrastructure investment. Expect strategic stockpiling across commodities to accelerate. The geopolitical shock reinforces these trends, but it did not create them. Scarcity was already the story. Events like these simply remind markets how quickly supply can be constrained.
