Investment Review №339. Playing Defense
Update to Our Investment Outlook Following the U.S.–Israel–Iran Military Escalation
The analysis in our investment note was prepared prior to the outbreak of full-scale conflict between the U.S., Israel, and Iran.
The situation has deteriorated faster than the market priced in, though the buildup wasn’t a surprise. As anticipated, Israel struck first, with Iran’s initial counterpunch landing squarely on Israeli targets. Crucially, U.S. and Israeli forces avoided hitting Iran’s energy infrastructure, consistent with our scenario planning. The Islamic Revolutionary Guard Corps’ (IRGC) strikes remain sporadic and indiscriminate, targeting not only U.S. military bases across the Gulf, but also hotels and non-military sites. Hits on energy assets are isolated; the notable exception is Saudi Aramco’s refinery, which has pushed oil, gas, and energy equities higher. Shipping disruptions in the Strait of Hormuz, channeling >20m barrels of crude and refined products daily, are adding upward pressure on prices. LNG flows are also at risk, with ~20% of global LNG exports transiting the strait.
Israel and the U.S. have established air dominance over Iran. In the coming days, the focus will be systematic elimination of Iran’s missile and drone stockpiles, launchers, production facilities, and missile fuel, dramatically curtailing the IRGC’s ability to strike beyond Iran’s borders. Air superiority is sustainable: the region hosts a high number of tankers/refuelers, ensuring continuous, long-duration control. Simultaneously, we expect Iranian naval assets—ships, small craft, ports, and anti-ship missile stockpiles—to be largely neutralized shortly, sharply reducing Tehran’s capability to target surface vessels, crude/oil product tankers, and LNG carriers.
We view the recent oil price surge as likely short-lived, for several reasons:
1. OPEC+ production increases: At the March 1 meeting, OPEC+ agreed to raise April production quotas by 206k bbl/d. The bloc may continue this pace through September 2026, potentially lifting output by a cumulative 1.2m bbl/d;
2. Seasonal demand slowdown: Refineries typically undergo maintenance in April–May, reducing crude demand;
3. Easing of geopolitical risk premiums: As IRGC military assets and personnel are neutralized, the intensity of hostilities is expected to decline.
Similarly, we expect the recent natural gas price rally to be temporary. U.S. storage is projected to shift from withdrawal to injection mode by the second week of March, putting downward pressure on domestic gas prices. Seasonal demand in the Northern Hemisphere reaches a nadir in May, reinforcing expectations for further price moderation in the coming months.
It is also worth noting that U.S. oil and gas equities are materially overbought and could see a 20–30% correction over the coming months. The XLE sector ETF closed February 27 trading 10.4% above its prior all-time high from June 2014. At that time, WTI crude exceeded $106/bbl—57.7% higher than February 27, 2026 levels.