Israel vs Iran: Navigating a new regime of geopolitical risk

Business Times

23-06-2025

ISRAEL'S 'pre-emptive' strikes directly against Iran on Jun 13 represents a meaningful escalation in what had been Israel's ongoing battle against primarily Iranian proxies. It now represents a direct confrontation between regional powers in the Middle East, drawing a red line which Israel has not crossed previously in its long-running conflict.
Following Russia's 2022 invasion of Ukraine, we analysed geopolitical conflicts since World War II as categorised by the Glenview Trust, an investment adviser. Major power conflicts (US-Soviet primarily) and short-lived conflicts between 'mismatched adversaries' proved limited in their impact on US equity returns. In contrast, more prolonged conflicts (such as the Russia-Ukraine war that began in 2022) generated more headwinds for US equity markets in both their initial stages as well as over the year after they started.
Most impactful: energy market disruptions
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 and prolonged regional cross-border conflicts based on our analysis.
Thus, while the humanitarian costs of such conflicts are paramount, for investors, the prospect of spillover to global energy flows poses the most imminent risk to global capital markets, in our view.
With press reports indicating that Israel has attacked Iranian refineries and storage capacity as well as its Pars natural gas field, BCA Research suggests that these facilities are primarily for domestic Iranian use rather than for export. This is consistent with growing signs of Israel's intent to foment domestic instability and 'regime change' in Iran, rather than – for now – to disrupt Iran's energy exports and potentially roil global energy markets.
Despite this and in light of the recent US strikes on Iranian nuclear sites, global energy prices have begun to factor in the prospect of more sustained disruption. Prices have increased not only in spot markets, but also in futures markets as far as 12 months out.
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In contrast, the 2019 Iranian strikes on Saudi energy infrastructure proved temporary in their impact on global oil supply. There was limited effect on six and 12-month oil futures prices in the immediate aftermath of the attacks.
Admittedly, the June moves in crude prices remain short of the market pricing following both the 1990 Iraqi invasion of Kuwait as well as the 2022 Russian invasion of Ukraine, which resulted in prolonged disruption in global energy flows, leaving risk for markets should further escalation emerge.
It is important to recognise that both the 1990 and 2022 energy market shocks were met by releases from the US' Strategic Petroleum Reserves that mitigated the longevity of the supply shocks. In 2022-23, the US released more than 300 million barrels of crude from its 650 million barrel stockpile, helping to bring down prices in the aftermath of the Russian invasion and ensuing sanctions.
However, having only recently begun to restock and with only 400 million barrels in storage, it is unclear if the US could provide yet another comparable supply offset to a global oil supply shock, should the direct Israel-Iran conflict spur one.
Risks of an oil supply shock
We see two key risks to such a shock. First, should Israel's strategies evolve and it moves to strike Iran's primary energy export terminals at Kharg Island, this could directly impact Iran's 1.5 million to two million barrels of crude exports – a meaningful, but potentially a replaceable amount in the 100 million barrel per day global market.
However, much like Russia's response to European efforts to limit Russian energy exports in the aftermath of Russia's 2022 Ukraine invasion, Iran may seek to weaponise global energy prices, either in response to an Israeli move against Iran's oil terminals by moving to disrupt or even close the movement of the nearly 20 million barrels of supply through the Persian Gulf bottleneck in the Straits of Hormuz. Such a volume would not be quickly replaceable globally.
The second risk involves a shift in Iranian calculus. With Israel having struck Iran's nuclear facilities with more traditional 'bunker-busting' munitions, Iran has seen damage to its nuclear supply chain according to the International Atomic Energy Agency.
Should Iran's leadership perceive a weakening or should the recent follow-on US strikes use more advanced munitions to further degrade the capabilities of Iranian nuclear deterrence, Iran may turn pro-actively to Russia's 2022 approach. In this instance, it would seek to impose – at a minimum – 2022-style costs on global and western economies, in the hopes that the US and European countries can rein in what appears to be currently unconstrained Israeli efforts at regime change.
Economically, we estimate that the recent rises in energy prices – following the initial stages of the conflict – pose only modest risk to current global inflation trajectories. However, current levels of global crude prices means we have seen the trough in US inflation momentum – which Patrice Gautry, Union Bancaire Privee's global chief economist, had been anticipating since early 2025.
Inflation catalysts
Looking ahead, however, the battle against inflation globally, which many had hoped would be won in 2025, would face potentially three catalysts for higher prices: US President Donald Trump's tariffs; broadening fiscal policy stimulus in the US, Europe and potentially China; and the prospect for a global energy supply shock on the horizon.
Beyond this, though the recent escalations in the Israel-Iran and US-Iran conflict are worrisome in themselves, investors should also recognise that a growing range of events – including India-Pakistan and Russia-Ukraine tension – have crossed red lines that previously constrained both sides in long-running conflicts. They likely represent a growing series of events presaging a regime of elevated geopolitical volatility.
That such events are occurring with greater frequency may indicate that the global powers – US, Russia and China – are either no longer willing or, more troubling, unable to constrain their surrogates at maintaining the historical status quo in these regional conflicts. This suggests that investors should expect nations involved in such regional conflagrations to embark on new and disruptive journeys to establish new equilibria.
For financial market participants, it suggests that the periodic spikes in volatility seen in equity and bond markets are part of this new equilibrium. This requires a proactive risk management approach as a core part of investors' portfolio allocations.
The writer is group chief strategist at Union Bancaire Privee, a private bank and wealth management firm