Israel’s ‘pre-emptive’ strikes against Iran on 13 June represent a meaningful escalation in what had been Israel’s ongoing battle against primarily Iranian proxies. The conflict has now shifted towards a direct confrontation between the two regional powers in the Middle East.
Key takeaways
- Israel’s ongoing battle against primarily Iranian proxies has now shifted towards a direct confrontation between the two powers in the Middle East.
- The recent airstrikes pose risks to the new energy market landscape; however, further fallout for global energy prices seems, for now at least, limited.
- Geopolitical risks are rising, but financial markets are currently not pricing in a worst-case scenario.
Back in February 2022, we analysed geopolitical conflicts since World War II as categorised by the Glenview Trust. Major power conflicts, primarily between the US and the Union of Soviet Socialist Republics (USSR), and short-lived conflicts between ‘mismatched’ adversaries had a limited impact on US equity returns. In contrast, more prolonged conflicts such as the one started in 2022 between Russia and Ukraine, generated more headwinds for US equity markets in both their initial stages as well as looking out over the year after they started (see Chart 1).
According to our analyses, regional conflicts which result in energy market disruption – notably Iraq’s 1990 invasion of Kuwait and Russia’s 2022 invasion of Ukraine – have been among the most impactful prolonged, regional cross-border conflicts.
With press reports indicating Israel has attacked Iranian refineries and storage capacity as well as its Pars natural gas field, BCA Research suggests that these facilities are used primarily for domestic Iranian use rather than for exports. This might imply that Israel’s intent is to foment domestic instability and ‘regime change’ in Iran, rather than undermine its primary export earnings via oil & gas exports; this may, for the time being at least, limit the fallout for global energy prices.
Indeed, after having reacted to the immediate news of Israeli attacks on Friday, global energy prices started to factor in the prospect of more sustained disruption with price increases. However, the progression on crude prices since 13 June remains short of market pricing following both the 1990 Iraqi invasion of Kuwait and the 2022 Russian invasion of Ukraine.
Historically, prolonged conflict poses the greatest risk to S&P 500 returns
Both the 1990 and 2022 energy market shocks were met by announcements from the United States’ Strategic Petroleum Reserve. In 2022–23 in particular, the United States released over 300 million barrels of crude from its 650-million-barrel stockpile, helping to bring down prices in the aftermath of the Russian invasion. However, with only 400 million barrels remaining, it is unclear whether or not the US could provide yet another comparable supply to offset a global oil-supply shock.
Geopolitical developments are hard to anticipate, and multiple scenarios are still in play; however, the strikes pose two key risks to this new energy market landscape.
First, Israel could strike Iran’s primary energy export terminals on Kharg Island, much like Russia’s response to European efforts to limit Russian energy exports in the aftermath of Russia’s 2022 Ukraine invasion. In this case, Iran may seek to weaponise global energy prices by moving to shut off the movement of supplies through the Persian Gulf bottleneck in the Strait of Hormuz, likely forcing the United States into a decision about whether to strike Iran directly in order to re-open the flow of oil and potentially crossing the latest ‘red line’ since the US–Iran engagement in 1979.
Second, having struck Iran’s nuclear facilities with more traditional ‘bunker-busting’ munitions, the International Atomic Energy Agency has confirmed damage at Iran’s Natanz facility. However, strikes at Iran’s Fordow facility, deeper underground and thought to be resistant to all but the largest American non- nuclear munitions (and only deliverable via US B-2 bombers), have not resulted in any comparable damage. Should Iran fear its nuclear programme is under serious threat, once again, they may turn to Russia’s 2022 approach; this means that they may seek to impose 2022-style costs on global and, in particular, Western, economies in the hope that the US and European countries can rein in what currently appears to be unconstrained Israeli efforts.
The recent rise in energy prices probably poses only limited risks to current global inflation trajectories. However, current levels of global crude prices could mean we have seen the trough in US inflation momentum which we have been anticipating since early 2025.
The realisation of these risk scenarios could lead to a 2022-style supply move through global energy markets. This assumption would imply an inflationary trajectory for the US economy driven not only by higher oil prices but also by potentially higher US tariffs, and would curb US economic growth.
Crude oil markets are not pricing in a sustained supply disruption as they did during the 1990 Kuwait invasion or 2022 Ukraine invasion
Although the recent escalations in the Israel–Iran conflict are worrisome in and of themselves, the events of 13 June have crossed red lines that have previously constrained both sides. This means that they probably only represent one event in the new, heightened geopolitical volatility regime that is unfolding.
Moreover, Ukraine’s strikes against Russia’s strategic bomber forces have potentially changed the landscape of the Russia–Ukraine conflict as well, expanding the battlefield from Ukraine and linking supply lines to now extend to Russia’s strategic weapons stock, raising the risk of a commensurate Russian retaliation against Ukraine’s backers in Europe and the United States.
The combination of all these events in recent weeks is a concern and may indicate that the global powers, namely the United States and Russia (and the Soviet Union before) are either no longer willing, or – more troublingly – no longer able to constrain their surrogates in maintaining the historical status quos in these regional conflicts. If correct, the parties involved would seek to establish a new equilibrium in these conflicts.
US regime-change efforts have shifted significantly since the Cold War era, when the focus was on preventing ‘dominoes’ from falling in Asia, Africa, and South America in its struggle against the Soviet Union. Today, the emphasis is disproportionately on the Middle East and North Africa.
Markets tend not to price in geopolitical risks until there is a conflagration, and they are currently showing little sign of factoring in a worst-case outcome. However, such tensions typically lead to increased volatility in risk assets. Our diversified asset allocation approach, initiated at the start of the second half of the year, remains relevant in this context. Each asset plays a role in strengthening portfolios against potential market stress. We maintain our convictions across asset classes, favouring equities over bonds and maintain a positive stance on gold, which remains a key hedge in the event of an extreme geopolitical shock.
The opinions expressed herein are correct as at 20 June 2025 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
