How Geopolitics, Oil Prices, and Market Resilience Intersect

In the world of investing, few things rattle nerves like geopolitical conflict. From wars in the Middle East to Russia’s invasion of Ukraine, these events have shaped headlines—and in many cases, temporarily shaken markets. Yet, history shows a surprisingly consistent trend: while geopolitical events often cause short-term market volatility, their long-term effects on equity markets tend to fade.

This article explores the intersection of global conflicts, oil price volatility, and the stock market's response—providing insights that are as valuable for long-term investors as they are for geopolitical analysts.

Setting the Scene: Oil Prices & Middle East Conflict

The first chart offers a compelling narrative: oil prices have repeatedly spiked during times of Middle Eastern conflict. Whether it's the Gulf War in the early 1990s, the Iraq War in 2003, or the Arab Spring in the early 2010s, each geopolitical flashpoint has triggered price shocks in the oil market.

Key Observations from the Chart:

• Gulf War (1990–91): Oil prices surged from around $17 to nearly $40 per barrel, a jump of over 100% in a short span.

  
  

• Iraq War (2003): This led to a massive price surge, with Brent crude climbing from under $30 to a peak of nearly $140 by 2008.

  
  

• Arab Spring (2011): Political instability in several oil-producing nations pushed prices above $120.

  
  

• ISIS Insurgency (2014–16): Caused more moderate spikes, but by then, US shale production had begun acting as a stabilising force.

  
  

• COVID-19 (2020): While not a geopolitical conflict, it's worth noting the sharp plunge in oil prices—briefly turning negative in some markets—as demand evaporated.

  
  

• Recent Trends (2023–24): Brent crude saw another uptick, crossing $120 in early 2022 following Russia’s invasion of Ukraine, before falling back to around $75–$80 as of mid-2025.

  
  

Despite wild fluctuations, the long-term trajectory shows that oil prices tend to revert after periods of geopolitical stress.

The Oil Market’s Sensitivity: A Deeper Dive

Why does oil react so sharply to conflict?

Oil is not just a commodity—it’s a geopolitical asset. About 48% of the world’s proven oil reserves are located in the Middle East. When tensions flare up in this region, traders immediately factor in the risk of supply disruptions.

According to the U.S. Energy Information Administration (EIA), around 21 million barrels per day of oil pass through the Strait of Hormuz, a chokepoint that borders Iran. Any threat to this supply route instantly causes ripple effects in global pricing.

But what happens after the dust settles?

Historically, supply adjustments, strategic reserves, and alternative energy sources have mitigated the long-term impact of supply shocks. Furthermore, with renewable energy adoption and improvements in energy efficiency, economies are gradually becoming less oil-intensive.

Equity Markets: Short-Term Panic, Long-Term Perspective

The second chart compares how the S&P 500 index has reacted before and after major military invasions, including the Arab-Israeli War (1973), Russia’s invasion of Ukraine (2022), and the most recent (and hypothetical) US invasion of Iran (2025).

Key Insights:

• The initial reaction tends to be negative—markets typically fall in the months leading up to and immediately after a conflict.

  
  

• However, within 6–12 months, the market often stabilises, with the average trajectory continuing its upward trend.

  
  

• Israel-Gaza War (2023) and Russia-Ukraine (2022) show strong post-conflict rallies.

  
  

• The Arab-Israeli War (1973) was a notable exception, due to the OPEC oil embargo that led to a severe global energy crisis.

  
  

• Even the 2025 Iran conflict line (highlighted in green) shows early decline but begins recovering by the 3–6 month mark.

  
  

This tells us that markets are resilient—they price in risk quickly and move on just as fast.

What Investors Should Learn from These Trends

1. Volatility ≠ Long-Term Risk

Markets are emotional in the short run. Conflict, panic, and uncertainty create sharp dips—but those who stay invested generally recover their losses and gain more over time.

2. Oil Spikes Are Temporary

Even in the face of conflict, oil prices eventually stabilise. In fact, oil price spikes have been less severe in recent years, thanks to diversification, renewables, and increased domestic production in countries like the U.S. and Brazil.

3. Diversification Is Your Best Defense

Geopolitical risks can hit specific sectors (like energy or defense), but broader indices like the S&P 500 remain relatively stable. This is why a diversified portfolio is key—no one asset class should dominate.

4. Opportunities Arise in Uncertainty

Contrarian investors often benefit from market overreactions. Buying during geopolitical fear can be profitable, provided you have a long-term outlook. Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.”

Where Oil and Equities Meet: The Energy Sector Case

According to JP Morgan Asset Management, the energy sector has historically outperformed the broader market during periods of heightened geopolitical tension. For example:

• During the Russia-Ukraine war in early 2022, energy stocks in the S&P 500 rose over 40% YTD while the broader index declined.

  
  

• Defense stocks, like Lockheed Martin and Northrop Grumman, have also seen strong performance during periods of military escalation.

  
  

But these gains can be short-lived if the conflict doesn’t escalate or if diplomatic resolutions are reached quickly.

The 2025 Outlook: Iran, Oil, and Uncertainty

The hypothetical US invasion of Iran in 2025, as shown in the second chart, represents an extreme scenario—but it helps frame investor expectations. Iran, with its vast oil reserves, would likely trigger fears of global supply disruptions.

But as we've seen before, markets react sharply and then normalise. Moreover, a prolonged occupation is unlikely in the current political climate. That reduces the likelihood of an extended market downturn.

A Word of Caution: The Arab-Israeli Exception

While most conflicts have short-lived impacts, some—like the 1973 Arab-Israeli War—can lead to systemic shifts. The 1973 war led to the OPEC oil embargo, quadrupling oil prices and triggering a global recession. The key lesson? Watch the policy response. Market overreactions are one thing, but coordinated economic sanctions or supply embargoes can amplify the impact.

What You Should Do Now

In times of geopolitical uncertainty:

• Stay invested unless your investment horizon is very short.

  
  

• Review your sector exposure, particularly to energy, defense, and emerging markets.

  
  

• Don’t try to time the market. Historical data shows you’re more likely to miss gains than avoid losses.

  
  

• Focus on fundamentals. Strong companies with global exposure, diversified revenue streams, and solid balance sheets are more likely to weather any geopolitical storm.

When Fear Strikes, Let History Guide You

If history teaches us anything, it’s that markets are remarkably resilient. Oil prices spike, tensions rise, but time and again, the market climbs back. As we move through 2025 and watch tensions in the Middle East evolve, keep one eye on the headlines—and the other on the data.

The charts speak for themselves: fear is fleeting, but fundamentals endure.

Sources:

• Bloomberg Finance L.P., data as of June 2025

• JP Morgan Asset Management – “Eye on the Market”

• U.S. Energy Information Administration (EIA)

• International Energy Agency (IEA)

• “Geopolitical Risk and the Impact on Markets,” CFA Institute Research

• Statista – Historical Brent Crude Oil Prices

• The Economist, May 2025 Edition

RISK WARNING: All investing is risky. Returns at not guaranteed. Past performance and case studies are no guarantee of future results.

Disclaimer: The content provided on this blog is for informational purposes only and does not constitute financial advice. The opinions expressed here are the author's own and do not reflect the views of any associated companies. Investing in financial markets involves risk, including the potential loss of your invested capital. Past performance is not indicative of future results. 

You should not invest money that you cannot afford to lose. Mentions of specific securities, investment strategies, or financial products do not constitute an endorsement or recommendation. The author may hold positions in the securities discussed, but these should not be viewed as personalised investment advice. 

Readers are encouraged to conduct their own research and seek professional advice before acting on any information provided in this blog. The author is not responsible for any investment decisions made based on the content of this blog.

Alpesh Patel OBE

www.campaignforamillion.com