Iran-Israel Tensions Fuel Oil Rally, Investors Are Piling Into Energy ETFs

Investors have flocked into energy plays in the aftermath of last week's flare-up between Israel and Iran, signaling heightened expectations that escalating geopolitical tensions in the Middle East will continue to lift oil prices and benefit U.S. energy firms.

On Friday, a day after Israel launched "Operation Rising Lion" targeting over 100 Iranian nuclear and military sites and Iran retaliated with missile attacks on Israeli cities, the Energy Select Sector SPDR Fund XLE attracted $199 million in fresh capital, according to TradingView data.

That marks the largest single-day inflow since late April and the third-highest this year.

Over the full week, XLE pulled in $470 million—its biggest weekly haul since October 2024—while also logging six consecutive sessions of gains, the longest winning streak in eight months.

Looking at specific energy industries, the SPDR Oil & Gas Exploration & Production ETF XOP also witnessed consistent demand throughout the week, recording five straight days of inflows. Weekly net investments hit $310 million, the second strongest week of 2025 for the fund.

Other sector-focused ETFs trailed the energy fund's inflows, with the Materials Select Sector SPDR Fund XLB pulling in $295 million and the Utilities Select Sector SPDR Fund XLU attracting $267 million for the week.

Big Fear Is Iranian Oil Disruption

The renewed conflict pushed West Texas Intermediate crude to $72 per barrel by Friday, a 12% weekly gain and its strongest performance in years, as investors priced in rising supply risks.

Riding the wave of higher oil prices, the Energy Select Sector SPDR Fund outperformed the S&P 500 by 6% last week—its biggest weekly outperformance since September 2024 and the second largest since October 2022.

"Thus far, at least, Israel has not directly targeted Iran's oil supply, which appears to be unaffected," said Matthew Ryan, head of market strategy at Ebury, in an emailed comment.

"The big fear for investors is that an escalation will not only raise the risk of a prolonged conflict, but it could disrupt Iranian oil production."

The Goldman Sachs commodities team sees a rising geopolitical risk premium. In one modeled scenario, they assume Iran's output drops by 1.75 million barrels per day over six months due to infrastructure damage, with core OPEC+ offsetting only half of that.

In such a case, Brent could peak just above $90 before falling back to the $60s in 2026 as Iranian supply recovers.

Yet, Goldman's Daan Struyven also warned of more extreme outcomes. If broader regional production or logistics—especially in the Strait of Hormuz, the narrow passage that carries nearly 20% of global oil—are impacted, prices could exceed $100 per barrel.

"In that extreme tail scenario, OPEC+ may be unable to deploy enough spare capacity," Struyven said, highlighting that the oil market remains vulnerable to sudden shocks, particularly through chokepoints like Hormuz.

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