Dongwu Strategy: Four Configuration Ideas for Hedging Against Rising Oil Prices

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

Path 1: High inflation weakens non-U.S. assets; Chinese assets may become more resilient or move independently

High inflation weakens non-U.S. assets. From the current conflict, it is unlikely that the U.S. and Iran will reach a ceasefire in the short term; especially since Iran’s three proposed ceasefire conditions are quite stringent, making oil prices prone to rise. Historically, when crude oil prices surge rapidly, global production costs are impacted, leading to a quick rise in U.S. CPI; the Fed responds with rate hikes to effectively combat high inflation. Generally, as the global asset pricing anchor, a strong dollar exerts a siphoning effect on non-U.S. assets. For example, when the dollar is strong, the Hang Seng Index tends to weaken, and vice versa.

This round, Chinese assets may be more resilient or move independently. The key difference in this cycle is that the U.S., as a participant in the conflict, has not been able to escape the quagmire of war in the short term, and high oil prices have constrained U.S. inflation. Meanwhile, China has been continuously improving its foreign exchange reserve structure in recent years, reducing the impact of dollar shocks; and China’s dependence on crude oil is much lower than that of other manufacturing countries, thanks to recent investments in renewable energy to ensure energy security. Therefore, compared to other risk assets, Chinese assets are more secure; recent major indices show less sensitivity to shocks and are expected to perform independently. Considering overseas liquidity constraints, value stocks may outperform.

Path 2: Price increase chain mainly trades oil prices, but medium-term sustainability depends on overseas demand

Markets often trade expectations, with chemical and agricultural products following oil price trends. Traditional transmission logic suggests that rising energy prices increase chemical production costs, which are then passed on through relatively demand-inelastic agricultural products, forming an energy→chemical→agricultural chain. For example, during the Russia-Ukraine conflict in 2022, chemical export 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 trading perspective, when oil prices fall, chemical prices are expected to follow, with nearly simultaneous peaks. The same applies to agricultural products. Although this cycle’s rising oil prices can boost chemical and related agricultural prices, oil remains the primary trading focus.

The sustainability of the price increase 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, minor metals, precious metals) and chip-related industries. Comparing exports, it’s clear that 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 led to a rapid rebound in major bulk commodity prices, but in Q4, without signs of demand recovery, prices of steel, coal, and other domestic-demand-driven commodities continued to decline. Therefore, the medium-term sustainability of the price rally still depends on demand, especially overseas demand. We recommend focusing on sectors like energy storage, AI, and machinery with high overseas demand.

Path 3: Substitution effects of soaring energy prices, focus on energy storage, wind power, photovoltaics, lithium batteries, and power grids

Recently, coal has shown substitution effects, but their impact is limited. Substitution effects can effectively ease the pressure of continuous oil price increases, so coal prices tend to rise in tandem with oil. 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 the Russia-Ukraine conflict in 2022, global energy costs increased, especially intensifying European energy cost pressures. For long-term energy security, countries are increasing capital expenditure on energy projects. The U.S. increased power sector investments in 2022-2023 at the highest rate since the 2008 financial crisis; China also increased capital spending on the broader energy sector from 2022 to 2024. From listed companies’ perspectives, petrochemical, power, utilities, and coal sectors’ capital expenditures in 2024 account for about 40%. 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 in 2030. From 2024 to 2030, data center electricity demand is projected to grow at about 15% annually, over four times the growth rate of total electricity consumption across all other industries.

Europe and the U.S. are accelerating energy infrastructure investments, benefiting sectors like energy storage, wind power, photovoltaics, lithium batteries, and power grids. To ensure future energy security, Europe and the U.S. are increasing investments: the UK has eliminated 33 wind power component import tariffs since April 1, reducing tariffs on blades and cables to zero, aiming to unlock £22 billion in investment and accelerate North Sea offshore wind projects. Germany’s draft “Renewable Energy Act (EEG 2027)” proposes halting fixed feed-in tariffs for new small photovoltaic installations under 25kW. The “Nine Countries of the North Sea” alliance, Iceland, the EU, and NATO jointly signed the “Hamburg Declaration,” aiming to build 300 GW of offshore wind capacity by 2050 (including 100 GW cross-border projects). Due to China’s technological advantages in photovoltaics, wind power, and lithium batteries, we believe overseas renewable energy development will boost related sectors like energy storage, wind, solar, lithium batteries, and power grids.

Path 4: Energy dependence impacts Japanese and Korean industries, potentially altering AI industry landscape

Energy dependence impacts Japanese and Korean industries, especially the semiconductor supply chain. For export-oriented and manufacturing economies like Korea and Japan, the ongoing blockade of the Strait of Hormuz by Iran not only short-term increases production costs but also poses physical “supply disruption” risks. By 2024, South Korea’s net crude oil imports account for 98.6% of total crude oil supply, with the Strait of Hormuz responsible for about 65-68% of South Korea’s oil imports; Japan’s oil and gas imports depend on over 85%. Therefore, ongoing Iran conflicts pose systemic risks to Korean and Japanese manufacturing systems, leading to systemic adjustments 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 exploding 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 increase. Two possible paths emerge: one, high storage prices persist, and downstream AI applications struggle to absorb costs, constraining AI development and impacting the capital expenditure capacity of companies like OpenAI; the application “singularity” could be delayed further, dragging down the current optimistic AI supply chain. Two, physical supply disruptions of oil and gas constrain Korean and Japanese chip production capacity, prompting AI developers to seek alternative capacity sources; currently, China relies on mature processes to break into high-end capacity, and in the short term, effective substitution may occur through packaging, testing, and module assembly.

Overall, oil prices are prone to rise and difficult to fall. The four main asset allocation paths are: (1) high inflation weakens non-U.S. assets; Chinese assets may become more resilient or move independently, with value stocks outperforming growth, China outperforming the U.S. and other emerging markets, under liquidity constraints; (2) the transmission chain focuses on oil prices themselves, with chemical and agricultural products showing excess performance aligned with oil; the sustainability depends on overseas demand, especially sectors like energy storage, AI, and machinery with high overseas demand; (3) substitution effects can ease energy price surges, focusing on coal and renewable energy development. The dual narrative of energy security + AI-driven electricity shortages emphasizes sectors like energy storage, wind, solar, lithium batteries, and power 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 lagging; geopolitical risks.

(Source: Dongwu Securities)