Oil, Risk, and Repricing: Market Fallout from the Israel–Iran Escalation

On June 13, Israel launched airstrikes against Iran, targeting military and nuclear sites in a major escalation that raised fears of a wider regional conflict.

The Israeli-Iranian flare-up has injected significant volatility into global markets, particularly in energy commodities and regional equities. Oil prices surged immediately on news of the strikes, reflecting traders’ fears that a wider conflict could threaten Middle East oil supplies.

In the initial hours of June 13, Brent crude futures spiked over 9%, hitting their highest level in nearly five months, one of the largest single-day moves since 2022[1].

This jump was driven by a sudden risk premium: although no oil facilities have been attacked so far, markets are pricing in the possibility of supply disruptions in the Persian Gulf, especially with Iran hinting at responses that could include targeting shipping routes.

Analysts noted that the Strait of Hormuz, through which about a third of global seaborne oil passes, has become a focus of concern, as Iran might retaliate by harassing tanker traffic rather than directly striking Western targets[2].

OPEC officials sought to calm the market, indicating that the escalation alone “did not justify any immediate changes” to oil output policy[3].

Indeed, with no physical disruption to supply so far, some of the initial price spike has begun to unwind. Analysts suggest that unless the conflict escalates to the point of impacting oil flows, prices could settle after this initial surge.

However, the short-term outlook for oil remains volatile. Every new incident or threat is likely to send prices swinging, and traders are keeping a risk premium baked into prices, meaning oil will likely trade in an elevated range so long as the conflict simmers.

Should the situation worsen, for example, if Iranian exports of ~1.7 million barrels/day were choked off by sanctions or military action, analysts project crude could quickly rally towards $80 per barrel or higher[4].

In a worst-case scenario involving closure of Hormuz, some estimates even foresee a price spike into triple digits, though that extreme is viewed as a low-probability outcome with severe global repercussions. For now, the oil shock is adding to inflation worries around the world.

Energy-importing nations face higher costs, and central bankers from Washington to Frankfurt have flagged that if oil sustains above $80 it could complicate monetary policy[5].

On the flip side, major oil-exporting countries (including Gulf states) stand to gain from the price windfall, a dynamic that is not lost on investors adjusting their positions.

Equity markets have reacted with a classic “risk-off” response. In the immediate aftermath of the strikes, global stocks slumped and volatility indices spiked. U.S. stock futures fell roughly 1.5% overnight as news broke, while safe-haven assets like gold and the U.S. dollar rallied[6].

Asian and European markets also turned downward amid fears of a broader Middle East war. Investors are essentially pricing in greater uncertainty: one strategist described the event as “a blow to risk sentiment” that hit just as markets were in a fragile, bullish stretch. MSCI’s broad world equity index, which had been near record highs, began “stalling” and dipping as traders cut exposure ahead of the weekend.

Particularly affected were stocks with exposure to the Middle East or those sensitive to oil shocks. Airlines, for example, saw shares fall as flights were cancelled and airspace over Israel, Iran, and neighbouring countries was largely shut down for commercial aviation[7].

Travel and tourism firms in the Gulf are facing uncertainty with potential security risks, and their stock prices reflected that jittery outlook.

In the Gulf Cooperation Council (GCC) region, major equity indices registered significant declines on June 13. Dubai’s benchmark index closed down about 1.9%, and Abu Dhabi’s index fell 1.3% (after steeper intraday drops), underperforming other global markets. These oil-rich markets might normally be buoyed by rising crude prices, but the local sell-off underscored how regional instability outweighs the oil revenue boost in investors’ calculus.

Gulf investors dumped shares across sectors on June 13, with real estate developers and insurers in the UAE seeing intraday losses of up to 4–5%. Insurance stocks. These moves reflected investor concerns that widening conflict could trigger higher claims, increased underwriting risks, and broader exposure for regional firms.

This Iran–Israel clash may prove more significant for markets than previous flare-ups in Gaza, given the heightened risk of direct confrontation between Iran and the United States[8]. If escalation continues, there is likely more room for Middle East sovereign bond spreads to widen. In effect, investors appear to be demanding higher risk premiums for regional assets, a trend reflected in the rising cost of credit default swaps (CDS) on debt from Israel and neighbouring states.

Looking ahead, market volatility is expected to remain elevated in the short term. Implied volatility indices jumped as traders rushed to hedge geopolitical risk. For instance, trading volume in crude oil call options hit multi-month highs as oil producers and speculators alike sought protection against further price spikes[9].

The cost of these options, and related instruments like volatility swaps, has spiked, indicating that markets are willing to ‘pay up’ for insurance against violent swings in prices.

Uncertainty around Iran’s next move, not whether it will respond again, but when and how, is likely to keep traders on edge and market volatility elevated in the near term.[10].

Every new headline, whether a diplomatic overture or a military exchange, could whipsaw markets. To navigate this environment, some investors are employing spread-based hedging strategies. These include shifting portfolios toward defensive plays, for example, overweighting energy and defence stocks, sectors expected to benefit or remain resilient during conflict, while trimming exposure to more vulnerable sectors like travel or emerging markets[11]. Such pairs trades allow hedging of Middle East risk without outright market timing.

Others are using volatility swaps and futures on indices, like the VIX, as direct hedges, effectively betting on further spikes in volatility should the conflict widen.

It’s important to emphasize that these are risk management tactics, not speculative recommendations: the goal is to cushion portfolios against geopolitical shocks, not to profiteer from war.

Indeed, large asset managers have indicated they are in ‘hunker down’ mode, reducing leverage, increasing cash buffers, and hedging tail-risk scenarios, such as an oil supply shock[12]. They remember that previous Middle East crises often led to sharp but short-lived market turmoil, so the focus is on containment: if the conflict is brief or limited, markets could retrace the initial panic, but if it drags on or expands, especially involving US-Iran clashes or disruption of shipping, then we may see a more sustained risk-off environment.

In summary, the outbreak of hostilities has injected considerable uncertainty, driving up oil price volatility and knocking back equities with Middle East exposure. Investors worldwide are recalibrating, bracing for higher volatility in the near term and using hedging instruments to guard against worst-case outcomes, while hoping that diplomatic efforts will prevent a full-blown regional war that could roil markets even further.

Written by Aries Russell

Managing Director, Aries Intelligence

[1] Reuters, “UAE bourses, regional markets, bonds fall after Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/uae-bourses-regional-markets-bonds-fall-after-israel-strikes-iran-2025-06-13/#:~:text=OIL%20PRICES%20SURGE.

[2] ING Think, “Middle East conflict: What it means for macro and markets,” June 2025, https://think.ing.com/articles/middle-east-conflict-what-it-means-for-macro-and-markets/#:~:text=complicity%20and%20may%20target%20American,targeting%20of%20regional%20US%20assets.

[3] Reuters, “Israel says it strikes Iran amid nuclear tensions,” June 13, 2025, https://www.reuters.com/world/middle-east/israel-says-it-strikes-iran-amid-nuclear-tensions-2025-06-13/#:~:text=Israel%27s%20military%20said%20it%20was,another%20nuclear%20site%20in%20Isfahan.

[4] ING Think, “Middle East conflict: What it means for macro and markets,” June 2025, https://think.ing.com/articles/middle-east-conflict-what-it-means-for-macro-and-markets/#:~:text=complicity%20and%20may%20target%20American,targeting%20of%20regional%20US%20assets.

[5] Reuters, “UAE bourses, regional markets, bonds fall after Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/uae-bourses-regional-markets-bonds-fall-after-israel-strikes-iran-2025-06-13/#:~:text=OIL%20PRICES%20SURGE.

[6] Reuters, “Stocks, oil sell off as Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/view-stocks-oil-sell-off-israel-strikes-iran-2025-06-13/#:~:text=MATT%20SIMPSON%2C%20SENIOR%20MARKET%20ANALYST%2C,CITY%20INDEX%2C%20BRISBANE.

[7] Reuters, “UAE bourses, regional markets, bonds fall after Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/uae-bourses-regional-markets-bonds-fall-after-israel-strikes-iran-2025-06-13/#:~:text=OIL%20PRICES%20SURGE.

[8] Reuters, “UAE bourses, regional markets, bonds fall after Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/uae-bourses-regional-markets-bonds-fall-after-israel-strikes-iran-2025-06-13/#:~:text=OIL%20PRICES%20SURGE.

[9] Bloomberg, “Traders Rush Back to Oil Options to Hedge Mideast Political Risk,” July 31, 2024, https://www.bloomberg.com/news/articles/2024-07-31/traders-rush-back-to-oil-options-to-hedge-mideast-political-risk#:~:text=Oil%20traders%20flocked%20to%20the,conflict%20in%20the%20Middle%20East.

[10] Reuters, “Stocks, oil sell off as Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/view-stocks-oil-sell-off-israel-strikes-iran-2025-06-13/#:~:text=MATT%20SIMPSON%2C%20SENIOR%20MARKET%20ANALYST%2C,CITY%20INDEX%2C%20BRISBANE.

[11] Reuters, “Stocks, oil sell off as Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/view-stocks-oil-sell-off-israel-strikes-iran-2025-06-13/#:~:text=MATT%20SIMPSON%2C%20SENIOR%20MARKET%20ANALYST%2C,CITY%20INDEX%2C%20BRISBANE.

[12] Reuters, “Stocks, oil sell off as Israel strikes Iran,” June 13, 2025, https://www.reuters.com/world/middle-east/view-stocks-oil-sell-off-israel-strikes-iran-2025-06-13/#:~:text=MATT%20SIMPSON%2C%20SENIOR%20MARKET%20ANALYST%2C,CITY%20INDEX%2C%20BRISBANE.