Analysis of the Impact of Middle East Geopolitical Tensions on Energy Markets and Defense & Military Sectors

According to the latest reports, U.S. President-elect Trump publicly warned of possible military action against Iran and will meet with Israeli Prime Minister Netanyahu at Mar-a-Lago to discuss military strike plans targeting Iran [1][2]. Earlier, Israel warned that Iran might use ballistic missile exercises as cover for a surprise attack [1]. This series of geopolitical developments marks a significant escalation of tensions in the Middle East in 2025.

, but concerns among the U.S.-Israel alliance about the reconstruction of Iran’s nuclear program are growing. Geopolitical analysts generally believe that the current situation has entered a highly sensitive period.

The rise in geopolitical risks has begun to manifest in financial markets:

• Crude Oil Market
  : International oil prices rebounded on December 29. Against the backdrop of no breakthroughs in Ukraine peace talks, the market reassessed geopolitical risks [3]
• Safe-Haven Assets
  : COMEX gold futures hit a record high of $4,530.8 per ounce intraday, with a cumulative annual gain approaching 70% [3]
• Energy Sector
  : The United States Oil Fund (USO) closed at $69.61 on December 30, up 1.65% for the day [0]; the Energy Select Sector SPDR ETF (XLE) closed at $44.62, up 0.95% [0]
• Defense & Military
  : Lockheed Martin (LMT) rose 1.21% to $488.87 on the same day [0]

• USO Crude Oil ETF
  : Monthly open $70.61, close $69.61, high $72.34, low $65.99, volatility 8.69%
• Daily Average Volatility
  : 1.57%, indicating the market is in a high volatility state
• Trading Volume
  : Average daily 4.81M, significantly higher than normal levels

1. Supply Disruption Risk
   : The Strait of Hormuz carries about 20% of global oil transportation; any military conflict could threaten this key waterway
2. Sanction Expectation Upgrade
   : If the U.S. and Israel launch a new round of military strikes against Iran, Iran’s crude oil exports (currently about 1-1.5 million barrels/day) may be completely interrupted
3. OPEC+ Production Capacity Buffer
   : Current OPEC+ spare capacity is about 5 million barrels/day, mainly concentrated in Saudi Arabia and the UAE, which can partially compensate for supply gaps in the short term
4. Strategic Reserve Release
   : The U.S. Strategic Petroleum Reserve (SPR) currently stands at about 380 million barrels, with short-term intervention capabilities

Scenario	Crude Oil Price Target	Probability	Key Assumptions
Baseline	$75-$85/bbl	50%	Local conflict, Strait of Hormuz remains open
Optimistic	$65-$75/bbl	25%	Successful diplomatic mediation, tensions ease
Pessimistic	$90-$110/bbl	25%	Full-scale military conflict, strait transportation interrupted

• ExxonMobil (XOM)
  : Market cap $508.2 billion, P/E ratio 17.52x, up 1.19% to $120.53 in December 2025 [0]. The company has a rich Middle East business layout and strong cash flow, benefiting significantly from rising oil prices.

• Chevron (CVX)
  : Market cap $301.8 billion, P/E ratio 21.24x, closed at $150.99 [0]. The company enhanced its Guyana assets through the acquisition of Hess, with high earnings elasticity to oil prices.

• Valero Energy (VLO)
  : Market cap $51.7 billion, P/E ratio 34.44x, closed at $165.66 [0]. As the largest independent refiner in the U.S., it performs well when cracking spreads expand.

• Schlumberger (SLB)
  : Market cap $56.6 billion, P/E ratio14.75x, closed at $37.90 [0]. The world’s largest oilfield service provider, will benefit from increased oil and gas exploration activities.

1. Short-term Allocation (1-3 months)
   : Increase holdings in upstream E&P companies, as they have the largest earnings elasticity in a rising oil price environment
2. Long-term Allocation (6-12 months)
   : Focus on integrated energy giants (XOM, CVX), as they have strong balance sheets and attractive dividend yields
3. Risk Hedging
   : Consider buying USO call options as a hedge for energy price risk exposure

• Monthly open: $45.29, close: $44.62, down1.48%
• High: $46.66, low: $43.77
• Volatility:1.21%, average daily volume:28.01M

Despite a slight overall decline in December, the geopolitical risk premium is being re-priced. The sector’s main holdings include XOM (23.5%), CVX (19.8%), COP (7.2%), etc.

###3.1 Overall Sector Performance

ETF	Price	Market Cap	December Change	P/E
ITA (Aerospace & Defense)	$217.00	$12.48 billion	+6.74%	37.47x
XAR (SPDR Defense)	$244.85	$4.61 billion	-	38.09x

Company	Ticker	Price	Market Cap	December Change	P/E Ratio
Lockheed Martin	LMT	$488.87	$114.41 billion	+7.85%	27.20x
Northrop Grumman	NOC	$577.78	$82.46 billion	-	20.81x
Raytheon Technologies	RTX	$184.42	$246.88 billion	-	37.87x
L3Harris	LHX	$295.93	$55.36 billion	-	31.85x
General Dynamics	GD	$340.48	$91.83 billion	-	22.07x

###3.2 Driving Factor Analysis

The escalation of tensions in the Middle East will directly drive the following demands:

• Missile Defense Systems
  : Increased demand for Israel’s Iron Dome and David’s Sling systems
• Precision Guided Weapons
  : Need to replenish inventories of JASSM, Tomahawk cruise missiles, etc.
• Intelligence Reconnaissance Systems
  : Increased deployment of satellites, drones, and other monitoring platforms

The Trump administration emphasizes the foreign policy of ‘peace through strength’ [1]. The2026 fiscal year defense budget is expected to reach:

• Base Budget
  : $850-$880 billion (3-5% increase from 2025)
• Overseas Contingency Operations (OCO)
  : Additional $20-$30 billion in special appropriations
• Key Investment Areas
  : Missile defense, hypersonic weapons, space forces, nuclear deterrence modernization

• NATO Allies
  : Continue to fulfill the ‘2% GDP’ defense spending commitment
• Middle East Allies
  : Saudi Arabia, UAE, etc., accelerate procurement of U.S.-made weapon systems
• Indo-Pacific Region
  : Japan, Australia, etc., have record-high defense budgets

###3.3 Investment Logic for Key Companies

• Core Advantages
  : The world’s largest military enterprise, with product lines covering F-35 fighters, missile defense, satellite systems
• Valuation Analysis
  : P/E ratio27.20x, at the historical median level
• Catalysts
  :
  • F-35 production increased to over160 units per year
  • Surge in demand for missile defense systems (THAAD, PAC-3)
  • Dividend yield of about 2.8%, continuous share repurchases
• Risks
  : Cost overruns, project delays, geopolitical uncertainty

• Strategic Position
  : Leader in B-21 Raider bombers and hypersonic weapons
• Valuation
  : P/E ratio 20.81x, relatively low among large-cap military stocks
• Growth Drivers
  :
  • B-21 enters mass production phase
  • Strong demand certainty for strategic deterrence systems (ICBM modernization)
  • Free cash flow yield of about5%

• Business Diversification
  : Aerospace engines (Pratt & Whitney), electronic systems, missile defense
• Challenges
  : Technical issues with Pratt & Whitney’s GTF engines lead to cost increases
• Opportunities
  : Strong demand for missile systems (Patriot, Standard series)
• Valuation
  : P/E ratio37.87x, high valuation requires attention to performance delivery

###4.1 Strategic Allocation Framework

Asset Class	Allocation Ratio	Target Selection	Expected Return
Energy Upstream	20-25%	XOM, CVX, COP	15-25%
Energy Services	10-15%	SLB, HAL, BKR	20-30%
Defense Contractors	25-30%	LMT, NOC, GD	12-18%
Defense ETFs	10-15%	ITA, XAR	10-15%
Direct Crude Oil Exposure	5-10%	USO, Crude Oil Futures	15-35%
Safe-Haven Assets	15-20%	GLD, TLT	5-10%

• XOM (15%), CVX (15%)
• LMT (20%), NOC (15%)

• Energy services and refining such as SLB, VLO
• Second-tier military stocks like RTX, GD
• ETFs like USO and ITA to enhance exposure

###4.2 Allocation for Different Risk Preferences

• Focus on large integrated energy companies like XOM and CVX (dividend yield3-4%)
• Allocate to ITA defense ETF to gain sector Beta exposure
• Appropriately allocate to gold ETF (GLD) as a safe-haven asset
• Expected Annual Return
  :10-15%
• Maximum Drawdown Control
  :15-20%

• Increase holdings in military leaders like LMT and NOC (greater capital appreciation potential)
• Moderately allocate to USO for direct crude oil price exposure
• Allocate20-30% to high-dividend stocks to reduce portfolio volatility
• Expected Annual Return
  :15-25%
• Maximum Drawdown Control
  :20-30%

• Heavy holdings in high-Beta oilfield service stocks like SLB, HAL
• Increase allocation to small military stocks (e.g., AeroVironment, Kratos)
• Use option strategies to enhance returns (buy call options, sell spread combinations)
• Expected Annual Return
  :25-40%
• Maximum Drawdown Control
  :30-40%

###4.3 Dynamic Adjustment Mechanism

Indicator	Danger Threshold	Adjustment Action
WTI Crude Oil Price	>$90	Reduce holdings in upstream E&P, increase refining
U.S.-Iran Conflict Index	>8/10	Increase safe-haven assets, reduce risk exposure
Defense Budget Growth Rate	<3%	Reduce military stocks, shift to healthcare/consumer
VIX Fear Index	>30	Increase gold allocation, use options to hedge

• Rebalance when the deviation of each sector exceeds5%
• Dynamically adjust energy/defense allocation ratios based on geopolitical developments
• Pay attention to the impact of post-U.S. election policy changes on sectors

###5.1 Main Risk Factors

1. Demand-Side Shock
   : Global economic recession leads to a decline in crude oil demand
   • Response: Allocate to integrated energy giants with more resilient cost structures

2. New Energy Substitution
   : Accelerated penetration of electric vehicles weakens long-term crude oil demand
   • Response: Focus on energy companies’ transition investments (e.g., XOM’s low-carbon business)

3. OPEC+ Production Increase Exceeds Expectations
   : Saudi Arabia’s large-scale production increase suppresses prices
   • Response: Use options to hedge downside risks

1. Budget Cut Risk
   : U.S. fiscal deficit pressure leads to lower-than-expected defense spending
   • Response: Prioritize core platforms with irreplaceability (e.g., F-35, B-21)

2. Geopolitical Detente
   : U.S.-Iran reaches a temporary agreement to reduce tensions
   • Response: Maintain partial positions in targets whose fundamentals are not affected by geopolitics

3. Technology Failure Risk
   : Major weapon system R&D fails or is delayed
   • Response: Diversify investments across multiple contractors to reduce single project risk

###5.2 Investment Time Window

• Focus on event-driven opportunities, position in crude oil and military before the possibility of U.S.-Israel military action rises
• Pay attention to high elasticity targets like USO options and LMT
• Risk
  : Rapid pullback if the event fails to materialize

• Focus on the long-term impact of sustained conflict on supply-demand structure
• Select leading companies with high financial report certainty and strong order visibility
• Risk
  : Geopolitical pattern evolution exceeds expectations

• Layout long-term trends of energy transition and defense modernization
• Focus on technological innovation (e.g., hypersonic, AI military applications)
• Risk
  : Technological route changes, policy shifts

###6.1 Core Views

The escalation of geopolitical tensions in the Middle East is reshaping the investment logic of energy and defense & military sectors:

1. Energy Market
   : Oil price risk premium rises, WTI crude oil price center is expected to move up to the $75-$85/bbl range in Q12025. Upstream E&P companies will gain the largest earnings elasticity, while integrated energy giants provide more stable investment opportunities due to their strong balance sheets and dividend yields.

2. Defense & Military
   : Geopolitical demand combined with U.S. defense budget growth significantly enhances the order visibility of military leaders. Companies with strategic monopoly positions like Lockheed Martin and Northrop Grumman are expected to receive continuous valuation re-rating.

3. Investment Strategy
   : Adopt a ‘core-satellite’ framework, with large energy and military companies as core holdings, and high-Beta stocks and ETFs as satellite allocations to capture excess returns. Maintain15-20% safe-haven assets to address tail risks.

###6.2 Key Monitoring Indicators

1. Timeline and scale of U.S.-Israel military action
2. Shipping safety in the Strait of Hormuz
3. Adjustments to OPEC+ production policy
4. U.S. FY2026 defense budget proposal
5. Global economic growth expectations and crude oil demand revisions

###6.3 Exit Strategy

Establishing a clear exit mechanism is key to risk control:

• Profit-Taking Line
  : Reduce holdings by50% when a single target’s return exceeds30%, and close all positions when it exceeds50%
• Stop-Loss Line
  : Reduce holdings by50% when a single target’s loss exceeds15%, and stop loss completely when it exceeds25%
• Sector Rotation
  : Gradually shift to growth and cyclical sectors when the VIX index drops below20 and geopolitical tensions ease

: This report is based on public information analysis and does not constitute investment advice. Investors should make prudent decisions based on their own risk tolerance and adjust strategies in a timely manner according to market changes.

[0] Jinling AI System - Real-time stock quotes, historical price data and market analysis (December30,2025)

[1] Fox News - “Trump’s peace through strength in2025: where wars stopped and rivals came to the table” (https://www.foxnews.com/world/trumps-peace-through-strength-2025-where-wars-stopped-rivals-came-table)

[2] Wall Street Journal - “Trump Threatens New Military Action With Israel Against Iran” (https://www.wsj.com/world/middle-east/trump-to-meet-netanyahu-to-hash-out-their-different-middle-east-visions-3ca243ba)

[3] Yahoo Finance Hong Kong - “Ukraine talks unclear + Middle East tensions international oil prices rebound” (https://hk.finance.yahoo.com/news/烏克蘭談判未明朗-中東緊張-國際油價反彈走高-163008413.html)

[4] New York Post - “Trump admin live updates: President and Netanyahu will meet at Mar-a-Lago to discuss Iran, Gaza cease-fire” (https://nypost.com/2025/12/29/us-news/trump-admin-live-updates-dec-29-30-31-25/)