Note: This article is for informational purposes and does not constitute financial advice.
While high oil prices are widely discussed with respect to their impact on players in the energy market, expectations of inflation and the response of central banks, the impact on Muslim investors is a different issue that cannot be measured by the same yardstick as other investments. Commodity prices behave differently from other assets and their interaction with Muslim finance investment structures demands a separate and more in-depth analysis in order to better understand their impact on Muslim investors and to enable them to invest wisely.
Why Oil Volatility Hits Differently in a Shariah-Compliant Framework
Most standard portfolios use a variety of securities to protect the value of the portfolio in the rare case of sharp rises in oil prices. Shares of the energy sector, oil futures-based ETFs, securities of other long positions in other commodities, and regular securities that are sensitive to interest rates are some of the examples of such securities. For a Shariah-compliant investor, however, most of the common instruments are not available as standard futures contracts on securities and commodities are not permissible under Islamic finance rules as they involve the sale of a commodity that the seller does not own at the time of contract, which is contrary to Shariah laws. Moreover, further leverage through margin trading also involves interest components and therefore is also not permissible.
While there has been something of a tilt in the investable universe in the direction of oil as prices have risen, this has not been to the benefit of Shariah-compliant investors in the same way that conventional investors have benefitted from investment in commodity futures or the most highly leveraged commodity related instruments which have themselves helped drive the recent surge in oil prices.
But then there is another dimension of asymmetry, namely the asymmetry between performance of conventional and Shariah compliant portfolios. During the oil price collapse of 2020, oil linked financial instruments such as oil linked notes, warrants, swap and options etc lost substantially all of their value. Interestingly, Shariah compliant portfolios have no investment in such oil linked instruments and although they may have missed out on higher gains in the bullish commodity market, they also missed out on much larger losses when the market corrected. Shariah literature and experience suggests that over the long cycle such portfolios would have lower highs but also lower lows.
Alternatives for Muslim Investors to own Commodities.
There are ways to adhere to Shariah while at the same time getting exposed to commodities; however such investments generally involve alternative instruments and may not be as immediately viable as other options.
Exposure to commodities can also occur through the shares of commodity-producing companies. For example, an oil producer, mining company or agricultural producer may be followed as a pure-play and Islamic screening requirements still need to be satisfied. However, for companies that are pure-plays and have clean balance sheets, such exposure is generally available. Historically, the 2026 oil shock has created significant value in the equity of Permian Basin producers, Brazilian integrated oil companies with upstream and downstream assets in Brazil, as well as E&P companies exploring and producing oil in Guyana. Shariah screened equities in these names have also created significant value for Muslim investors.
The other major commodity that I am seeing interest in, apart from oil, is Gold. Again, there are no derivatives issues and physical gold can be purchased or physical gold ETFs that are listed on the exchanges. Shariah compliant gold funds are also widely available. As we are in an oil shock environment, I believe gold will do well for 2 reasons. Firstly, it is a great inflation hedge as the higher oil price creates general price inflation throughout the economy. Secondly, Gold acts as a safe haven in times of high geopolitical risk.
Gold's Unique Status in Islamic Finance
In Islamic jurisprudence, gold has a unique status. While it is one of the six ribawi commodities for which there are certain rules and regulations with respect to their buying and selling in order to avoid the imposition of riba, it is also one of the two metals for which zakat is payable, for which the Prophet set out certain levels of nisab above which payment is required. Gold is coveted by a number of parties, including jewellers, retailers and consumers in general, as well as other commodities and metals that are sought after in Muslim societies and indeed in the global economy. In some Muslim societies, gold has, at times, served as a unit of account or a store of value for long periods of time, in addition to its well established status as one of the most valuable commodities.
To the discerning observer, this map to geopolitics and gold over the last half century is all too familiar. The 1973 oil embargo post 1979 Iranian Revolution, the 1990 Gulf War, the 2001 collapse of the World Trade Center, the 2008 global financial melt-down, and the looming conflict expected for 2026 over Iran are all issues that gold has successfully responded to over the decades. It is a fact well known to many Muslim investors that in Islam the holding of gold is not only a means to secure financial wealth but also a righteous deed that can keep a person away from the fire of hell.
A Trend in 2026 – continues to be! Recall how the sharp rise in Brent crude prices above $120 per barrel was immediately followed by a sharp correction in the global equity markets. The rise in gold prices reflects the interplay of three factors – rise in inflation, risk premium and safe-haven role of USD. For the Muslim investor, who had invested largely in gold, the correction in global equity markets must have brought considerable relief as gold seemed to stabilize a portfolio that was fraught with danger.
The Inflation Transmission Problem for Muslim Investors
An increase in oil prices is expected to have an impact on both inflation and the growth in real terms of future GDP. Higher oil prices also tend to have a pass through effect on general transportation costs to consumers and companies as well as the cost of key manufacturing inputs. Moreover, the producers of food, which accounts for a large proportion of the items in the consumer price basket, are expected to face deterioration in their conditions. For the Muslim investor, conventional approaches to dealing with higher inflation such as floating rate debt securities and interest bearing instruments are however not permissible under Islamic Finance. As such, Muslim investors are unable to consider fixed income securities, TIPS (Treasury Inflation-Protected Securities) or conventional inflation linked bonds.
However, what is really available is a combination of real assets and commodity linked equities. Rental yielding real estate, gold and agricultural land, equity in real assets like essential consumer goods, healthcare and infrastructure etc. Also sukuk with floating profit rates which are priced off commodities as opposed to interest rates and have gained immense popularity in the Islamic finance space. In fact, Islamic finance has come up with special sukuk structures for commodity linked infrastructure financing and they have performed well.
The concerns for Shariah compliant investors to protect their capital against inflation are as real as their conventional counterparts. This has to be addressed prior to a sharp and unexpected rise in inflation. Furthermore, such real assets need to be incorporated into the overall investment portfolio prior to any increase in general price levels.
The Gulf Equity Paradox
Despite the massive 2026 bull run predicted for the world in our last letter, it appears that the shock has, to date, failed to materialise in one of the more unexpected places: Gulf equity markets. While oil prices have more than doubled off their 2003 lows, the share prices of the biggest oil exporters – Saudi Aramco, Abu Dhabi National Energy Company (Desmond Yap) etc – are, at best, breaking even. Why? The answer is simple: the damage to oil export infrastructure in a war zone and the high risk premium demanded by investors. You cannot sell what you cannot ship.
Muslim fund managers across the region may soon discover that the value of their investments in GCC equity markets have fallen sharply. That the geographic concentration in Gulf equities poses serious conflict risks is the last thing they want to hear at a time when oil prices are soaring. However, logically and in accordance with Shariah principles, it is as important to have a diversified portfolio across geographies as it is to have one across sectors.
Three Structural Takeaways for Muslim Investors
In the short-term, Shariah-Compliant Portfolios may lack certain derivatives and leverage features that their conventional counterparts enjoy particularly in an environment of rising commodity prices. However, such portfolios have a competitive edge in the long term in that they do not suffer any loss when the market goes through a shock as was witnessed when the initial shock hit Gulf equity and emerging market currencies. Highly leveraged commodity positions suffered severe losses in this period whereas the Shariah-Compliant Portfolio did not incur any loss.
The second point to note is that even Muslim investors should hold some percentage of gold in their portfolios as a long-term investment and not for trading purposes. As I mentioned earlier, Gold is a different asset class and behaves differently than other traditional assets. Gold is a store of value and is most relevant in times of downturn that negatively impacts other assets. In fact, the current global financial crisis further supports this long held stance of Islam in relation to the holding of Gold and Silver as pure investment vehicles and not commodities for trading purposes. Gold is a commodity, but it is money, money proper, and wealth proper.
Clean energy is a priority for Muslim investors for three important reasons. The first is that the clean energy transition is not just a matter of interest to Muslim investors. Muslim investors are increasingly interested in investing in the clean energy sector, and there are many opportunities available for solar, wind, and other forms of renewable energy across the Muslim world. The second is that the clean energy transition is a matter of great importance to Muslim investors. The more the West becomes dependent on Hormuz for oil, the more that commodity prices will experience periodic shocks. Thus, Muslim investors have a financial interest in investing in solar infrastructure, battery technology and other alternative energy options across the Muslim world. The third is that the clean energy transition is a matter of Islamic interest to Muslim investors. Muslim investors should not invest in anything that causes harm. And, reducing our dependence on fossil fuels does not cause any harm.
Conclusion
The swings in oil price and commodity shocks are not ignored by Muslim investors and their portfolios are negatively affected, but not negatively affected worse than others. The difference lies in how they are affected and how strategies are designed to cope with them, which are absent in Islamic finance. These tools can be wonderfully helpful or hideously destructive. But the net benefit of not having these toxic tools is a more cautious, less leveraged portfolio profile that manages to protect capital better in difficult times, although it may also mean missing out on higher returns in good times.
The recent 2026 energy shock has catapulted real assets such as gold, Shariah compliant equities and commodity linked sukuk to the forefront of the Muslim investor's inflation and crisis defence portfolio. The old Islamic wisdom that gold was one of the fundamental forms of wealth and a must hold for every intelligent investor has ceased to be looked upon as old hat or relics of the past. In fact, it was highly forward looking given the current and projected global environment.
And Allah knows best — آمين
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