Dongwu Securities: Four Configuration Strategies to Hedge Against Rising Oil Prices

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Source: Dongwu Securities

Currently, Iran and the US have not eased tensions, and the Strait of Hormuz remains blocked, causing recent crude oil prices to surge, with Brent crude once exceeding $110 per barrel. In our previous report “2022 vs 2026: Oil Prices ‘Decide the Fate’,” we mentioned that if the conflict develops into a prolonged war, leading to mid-term oil price increases, it will create a new transmission pathway for the A-shares market: rising oil prices—imported inflation expectations—marginal tightening of Federal Reserve policies—deterioration of US dollar liquidity—pressure on tech stocks. Based on the experience from the Russia-Ukraine conflict, sharp increases in energy prices can impact global industrial patterns and reshape global supply chains. We have identified four transmission paths of rapid oil price increases on equity allocation:

Path 1: High inflation weakens non-US assets; Chinese assets may become more secure or move independently.
High inflation weakens non-US assets. Currently, given the ongoing conflict, it’s unlikely that Iran and the US will reach a ceasefire soon; especially since Iran’s three proposed ceasefire conditions are quite stringent, making oil prices prone to rise. Historically, when crude oil prices rise rapidly, global production costs are impacted, and US CPI accelerates; the Fed responds with rate hikes to combat high inflation. Generally, as the global asset pricing anchor, a strong dollar has a siphoning effect on non-US assets. For example, when the dollar is strong, the Hang Seng Index tends to weaken, and vice versa.

This round, Chinese assets are more secure or may move independently. The key differences are:
The US, as a participant in the conflict, has not escaped the quagmire in the short term, and high oil prices have constrained its high inflation. Meanwhile, China has been continuously improving its foreign exchange holdings structure, reducing the impact of dollar fluctuations; and China’s dependence on crude oil is much lower than other manufacturing countries, thanks to recent renewable energy developments ensuring energy security. Therefore, Chinese assets are relatively safer compared to other risk assets; recent major indices show less sensitivity to shocks and may develop an independent trend. Considering overseas liquidity constraints, value stocks may outperform.

Path 2: The price increase chain mainly involves oil trading, but medium-term sustainability depends on overseas demand expectations.
Energy prices rising push up chemical and agricultural product prices, which tend to follow oil prices. Traditional transmission logic suggests: rising energy prices increase chemical production costs, which are then passed on to relatively rigid agricultural products, forming an energy→chemical→agriculture transmission chain. For example, during the Russia-Ukraine conflict in 2022, chemical prices in Germany surged alongside rising import oil and gas prices, then began to decline about a quarter after oil prices peaked. From a market perspective, after oil prices fall, chemical prices are often expected to decline as well, with chemical stocks peaking nearly simultaneously with oil. The same applies to agricultural products. Although sustained oil price increases can boost chemical and related agricultural prices, oil remains the primary trading focus.

The continuation of price hikes still depends on overseas demand, especially in sectors like energy storage, AI, and machinery. Currently, domestic PPI continues to recover, and the market is generally optimistic about the transmission from PPI to CPI. However, the recent PPI rise is mainly driven by non-ferrous metals (energy metals, small metals, precious metals) and chip-related industries. Comparing exports, integrated circuits and high-tech products became the main drivers of February exports, indicating that effective PPI transmission still depends on demand-side changes. Relying solely on input-driven inflation makes it difficult to pass high costs downstream. Commodity prices in the second half of 2025 will reflect this: expectations of anti-inflation policies have led to a rapid rebound in major bulk commodity prices, but in Q4, with no signs of demand recovery, prices for steel, coal, and other domestic-demand commodities continued to decline.

Therefore, the medium-term sustainability of price hikes depends on demand changes, especially overseas demand. We recommend focusing on sectors like energy storage, AI, and machinery with high overseas demand.

Path 3: The substitution effect of soaring energy prices emphasizes energy-related infrastructure such as energy storage, wind power, solar PV, lithium batteries, and power grids.
Coal has a substitution effect but limited impact. This effect can help ease the pressure of rising crude oil prices, as coal prices tend to rise in tandem during oil price increases. However, due to policies like the European Climate Law and cost factors, Europe is accelerating coal phase-out, limiting coal’s influence mainly to China, India, and ASEAN regions, and unable to effectively curb oil and gas price increases.

Energy security + AI-driven electricity shortages accelerate energy infrastructure development. Post-2022 Russia-Ukraine conflict, global energy costs surged, especially in Europe. To ensure long-term energy security, countries are increasing capital expenditure on energy projects. The US increased power sector investments in 2022-2023 at the highest rate since the 2008 financial crisis; China also increased capital spending on the energy sector from 2022 to 2024, with petrochemical, power, utilities, and coal sectors accounting for about 40% of 2024 capital expenditure. Meanwhile, rapid AI iteration accelerates electricity consumption. According to IEA’s “Energy and Artificial Intelligence,” global data center electricity use is expected to double by 2030, reaching about 945 TWh, accounting for roughly 3% of total global electricity consumption. From 2024 to 2030, data center electricity demand will grow at about 15% annually, over four times the growth rate of other industries’ electricity consumption.

Europe and the US are accelerating energy infrastructure investments, benefiting sectors like energy storage, wind, solar PV, lithium batteries, and power grids. To secure future energy supply, they are increasing investments: the UK has canceled 33 wind power component import tariffs since April 1, reducing tariffs on key parts like blades and cables to zero, aiming to unlock £22 billion in investment and accelerate North Sea offshore wind projects.

Germany’s Federal Ministry for Economic Affairs has drafted the EEG 2027 amendment, proposing to stop fixed feed-in tariffs for new small PV installations under 25kW. The “Nine Countries” alliance, Iceland, the EU, and NATO signed the Hamburg Declaration, aiming to build 300 GW of offshore wind by 2050 (with 100 GW cross-border projects). Thanks to China’s technological advantages in PV, wind, and lithium batteries, overseas energy infrastructure development is expected to boost related sectors like energy storage, wind, solar PV, lithium batteries, and power grids.

Path 4: Energy dependence impacts Japanese and Korean industries, potentially altering AI industry patterns.
The ongoing Strait of Hormuz blockade by Iran not only short-term increases production costs but also poses physical “supply cutoff” risks. By 2024, South Korea’s net crude oil imports account for 98.6% of total crude supply, with about 65-68% of imports transported through the Strait of Hormuz; Japan’s oil and gas imports depend on over 85%. The sustained conflict impacts Korean and Japanese manufacturing systems, leading to systemic risks in their stock markets. As key producers of semiconductors, automobiles, and precision instruments, systemic energy risks will gradually transmit downstream, especially affecting storage chips driven by AI demand.

Rising storage chip prices may reshape the AI industry landscape. Affected by the Iran conflict, storage chip prices remain tight in the short term, making them prone to rise. Two possible paths: one, prices stay high, making it difficult for downstream AI applications to absorb costs, constraining AI development and impacting tech companies like OpenAI; two, physical supply disruptions of oil and gas constrain chip capacity in Korea and Japan, prompting AI development to seek alternative capacities—currently, China relies on mature processes to break into high-end capacity, and in the short term, packaging, testing, and modules may serve as effective substitutes.

Overall, oil prices are prone to rise, with four allocation paths:
(1) High inflation weakens non-US assets; Chinese assets may become more secure or move independently. Due to liquidity constraints, value stocks outperform growth; China outperforms the US and other emerging markets.
(2) The price increase chain mainly focuses on oil itself, with chemical and agricultural prices trending with oil; sustained price hikes depend on overseas demand, especially sectors like energy storage, AI, and machinery.
(3) Substitution effects can ease energy price surges, focusing on coal and renewable energy infrastructure. The dual narrative of energy security + AI-driven power shortages emphasizes sectors like energy storage, wind, solar PV, lithium batteries, and grids.
(4) Energy dependence impacts Japanese and Korean industries, temporarily boosting storage prices, mid-term affecting AI development, and long-term potentially shifting China’s chip share globally.

Risk warnings:

• Domestic economic recovery slower than expected;
• Federal Reserve rate cuts less than anticipated;
• Macro policy support weaker than expected;
• Technological innovation slower than expected;
• Geopolitical risks.