Conflict, Commodities, and Defense: Trading the War-Premium into 2H 2025
Conflict, Commodities, and Defense: Trading the War-Premium into 2H 2025
Executive Overview
The narrow, 36-hour “cease-fire” between the United States, Israel, and Iran briefly knocked Brent crude $4 lower and triggered a relief bid in equities. Yet the market’s forward curve, options skew, and cross-asset volatility markets all scream that geopolitical tail risk has merely been deferred, not destroyed. With Brent futures still 18 % above their early-June lows and analysts modelling an upside spike to $130 should the Strait of Hormuz constrict, we are still deep inside a war-premium regime. Trading it effectively means concentrating on three clusters: (1) energy producers with asymmetrically positive cash-flow sensitivity to high crude spreads, (2) defense primes and dual-use technology suppliers, and (3) volatility-harvesting ETF structures built to monetize post-event mean reversion. Beneath the headlines, each cluster now presents clear tactical levels, catalysts, and knock-on “what-if” scenarios.
1. Geopolitical Pulse—The Cease-Fire That Wasn’t
Reuters reported early Tuesday that President Trump had brokered a “conditional stand-down,” but Iran’s foreign minister immediately hedged, insisting hostilities will not cease unless Israel halts cross-border strikes. Markets recognise the choreography: both sides signal de-escalation to calm oil importers while keeping enough threats alive to sustain bargaining power. That gap between rhetoric and irreversible deeds is where option-writers get torched and directional traders thrive. Expect headline risk in Asian hours (Tehran’s preferred news-dump window) and use overnight futures liquidity to lean into dislocations rather than chasing them once New York opens.
2. Energy Complex—Fade the Knee-Jerk or Ride the Shock?
Baseline: Brent around $78 and WTI near $73 assume marginal barrels flow freely through Hormuz. Stress scenario: Oxford Economics models a 25 % supply loss pushing Brent to $130 and U.S. CPI back to 6 %.
A. Integrated Majors (XOM, CVX, COP)
Exxon and Chevron both hold 40 – 50 % downstream integration, allowing them to capture crack-spread blowouts even when spot crude whipsaws. Chevron’s mean-reverting beta (~0.95 versus XLE) makes it the cleaner volatility play: accumulate $146–$150, add above 50-dma at $153, risk to $142 (200-dma). Target Q3 swing high $168 (December 2024 gap).
B. Offshore & Permian Pure-Plays (OXY, FANG)
Oxy’s 80 % liquids mix delivers extreme cash-flow torque. The stock reclaimed volume-weighted average price (VWAP) from the March low at $60.25 on Monday—an inflection technicians watch closely. A daily close above $61.80 confirms a fresh impulse; use $59.40 as a fail-safe.
C. Refiners & Gas Bets (VLO, MPC, EQT)
Goldman notes refiners have handily outperformed exploration & production this year as natural-gas feedstock cheapened. Valero prints new relative-strength highs: enter on any pullback to $157 (confluence of 21-dma and former breakout). Natural-gas specialist EQT, up 26 % YTD, offers leverage to the LNG arbitrage powering Gulf Coast export margins; treat $40 as the bull/bear line.
3. Defense Prime-Contractor Renaissance
Lockheed Martin added 2.8 % last week despite a cut to F-35 deliveries—evidence that geopolitical premium is overwhelming near-term contract noise. Northrop Grumman and RTX printed similar divergence, aided by SIPRI’s data showing Middle-East defense budgets up 15 % in 2024.
Actionable Levels
LMT: Cleared $470 on above-average volume; next supply at $499 (January swing high). Risk below $455 gap.
NOC: Breakout through $445 triggers measured-move objective $485; stop $427.
RTX: Coil between $97–$101; a daily close above $101.20 targets $110.
Second-Derivatives
Consider dual-use suppliers such as L3Harris (communications), Kratos (drone swarms), and KBR (expeditionary logistics). They historically lag primes by 3–4 sessions post-headline, offering catch-up entries.
4. ETF Implementation—Concentrate or Barbell?
ITA (iShares U.S. Aerospace & Defense): 35 % LMT/NOC/BA weight, liquid options chain.
XLE (Energy Select Sector SPDR): captures integrated majors and refiners.
PXJ (Invesco Oil & Gas Services): tactical for day-traders but vulnerable in a cease-fire melt-down; size accordingly.
URA (Global X Uranium): A stealth beneficiary if Western utilities pivot away from Iranian oil to nuclear baseload.
Employ a barbell: long ITA core, trade around XLE vol-pockets, and keep URA as an upside convexity bet tied to longer policy cycles.
5. What-If Modelling—Closure of Hormuz
A 30-day blockage would strand ~17 m bbl/d; Brent forward curve implies a $30–$35 instantaneous shock. Using historical elasticities, Chevron EBITDA could expand 22 % while refiners capture >30 % crack-spread expansion. Conversely, airlines and chemical equities face double-digit EPS compression—an under-the-radar short-shield via XLY/XLI relative longs. Risk-reward apex: pairing XLE long with short JETS ETF if the closure probability rises above 20 % (based on option-implied skew).
6. Trade Management—Position Sizing, Volatility, and Optionality
With VXMT (6-month VIX future) still sub-22, vol is historically cheap relative to the macro tail-risk distribution. Directional longs should be wrapped with 10 – delta OTM put spreads financed via call overwriting, targeting 8–10 % yield on notional through expiry. If you can’t model this precisely, take the simpler route: allocate 3–5 % portfolio notional to VIX Jul-Aug calendar spreads.
