The oil price has surpassed $100 a barrel for the first time since 2022 after conflict in the Middle East and the near-closure of the Strait of Hormuz delivered a stagflationary shock to markets and sent investors searching for safe havens.
Investment strategists broadly agree that the best course of action in sudden outbreaks of volatility is to do nothing, relying instead on exercising caution in the near term, prioritising diversification and avoiding reactive selling.
But for those looking to introduce a more cautious tilt to their portfolio, Daniel Casali, chief investment strategist at Evelyn Partners, pointed to several hedges: gold and hedge funds, inflation-linked bonds, short duration sovereign bonds and energy equities.
Each addresses a specific dimension of the current risk environment, such as the inflationary shock, the uncertain rate outlook, rising government debt and the direct benefits accruing to oil and gas producers.
Brent crude was trading near $60 a barrel in January. By Monday morning it had surged to $119.50 before settling just over $100. Brent closed the London session at just over $99 a barrel.
“The US and Israeli military strikes on Iran are now reverberating through energy prices. Iranian drone and missile strikes on regional oil and gas infrastructure, along with damage to multiple tankers, have further heightened concerns about supply disruptions,” Casali explained.
The primary cause is the near-closure of the Strait of Hormuz, the 3.2-kilometre-wide shipping channel through which roughly a fifth of global crude oil and LNG exports normally pass. Five of the world’s 10 largest oil producers border the Persian Gulf and for all of them the Strait is the only maritime exit to global markets.
Qatar has declared ‘force majeure’ on LNG exports, which means it cannot meet contractual delivery obligations due to circumstances beyond its control. Iraq has cut output by 70% at its three main oilfields.
Multiple tankers have been damaged and marine war risk insurance has been withdrawn or severely curtailed by private markets. JPMorgan estimated the cost of fully insuring tankers in the Gulf at $352bn, well above the US Development Finance Corporation’s statutory cap of $205bn through 2031.
Dan Coatsworth, head of markets at AJ Bell, said: “Tipping over the $100 a barrel level has major implications from a psychological and economic perspective. It significantly raises the chances of a sharp jump in inflation and interest rates shifting to a completely different path than the market had priced in only two weeks ago.”
Casali characterised the shock as stagflationary: higher inflation combined with lower growth, a combination that limits central banks’ room to respond. Edmond de Rothschild Asset Management estimated that a $15 rise in oil prices adds 1 percentage point to inflation in developed economies whilst removing 0.3 to 0.4 percentage points from global GDP growth.
Rate expectations have shifted sharply. Coatsworth said markets are now pointing towards UK interest rates holding flat through the rest of 2026 and potentially rising in 2027. “That is radically different from recent expectations of more cuts this year,” he said.
Casali said: “Our base case is for a ‘contained conflict’ that has a limited global growth impact but with a transitory increase in inflation. For the moment, global equities continue to be underpinned by an upward expansion in company earnings.”
However, he pointed to several portfolio diversifiers that could be useful given the “inherent uncertainty and the asymmetric nature of wars”.
Gold and diversifying hedge funds address the geopolitical tail risk directly. Their low correlation to both equities and bonds during inflationary shocks makes them useful portfolio stabilisers.
Casali argued they are particularly suited to protection against geopolitical tail events. Recent days have seen stock markets sell off indiscriminately while government bond yields have risen.
Inflation-linked bonds, or linkers and TIPS, hedge against headline inflation surprises. Casali noted they also protect against the specific risk that central banks choose to tolerate temporarily higher inflation rather than tighten aggressively and deepen the growth slowdown. In a stagflationary environment, that tolerance is a plausible policy response.
“Given the current uncertainty over the inflation outlook and rising government debts and deficits over the medium term, it makes sense to keep portfolio exposure to short duration sovereign bonds, which are less sensitive to changes in the inflation outlook,” the strategist added.
Energy equities are the most direct expression of the oil price move. Casali noted they “historically do well when the price of crude oil rises.”
Coatsworth pointed to Shell and BP in a note on Monday: “The FTSE 100 fell 1.2% to 10,160 [in early trading], with only a handful of stocks in positive territory including Shell and BP as two beneficiaries of the sharp rise in the oil price. Their earnings could soar in the near term.”
The FTSE 100 ended 0.25% down at the end of Monday's session, with around 20 stocks – including Metlen Energy & Metals, Shell and BP – in positive territory.
The duration of the conflict is a key variable for the geopolitical impact, the oil price and its effect on the economy and portfolios. John Wyn Evans, head of market analysis at Rathbones, said Iran’s response had been the critical miscalculation.
“Previous cycles of tension were characterised by heavily signposted missile launches and attacks designed to allow Tehran’s leadership to claim resolve without provoking a broader escalation. This time, the strategy looks markedly different,” he said.
“When conflicts are counted in days, equilibrium is typically restored quickly. When they stretch into weeks, and when they involve essential commodities, the odds deteriorate.”
China may hold the key to any resolution. Casali argued that Beijing has both the leverage and the incentive to press Tehran toward de-escalation.
China receives around 40% of its crude oil through the Strait of Hormuz and remains Iran’s primary economic lifeline. President Xi Jinping also has a summit with US president Donald Trump approaching, creating an opportunity to offer restraint on Iran in exchange for tariff relief and eased technology export controls.
While Evelyn Partners’ base case is a contained conflict, Casali said the direction of risks is clear. “Upside inflation pressures are building as energy costs rise, while equities face mounting downside risk and bonds are increasingly exposed to renewed inflation momentum,” he warned.
“Geopolitical events are inherently unpredictable, which is precisely why we invest in highly diversified portfolios, built to withstand such risks over the long term.”
Wyn Evans cautioned against cutting market exposure in response.
“Materially reducing market exposure risks missing any sharp relief rally that could follow progress toward a settlement,” he finished. “But with little sign that Tehran intends to step back and Washington signalling that its definition of 'victory' remains fluid, good news may not be imminent.”