Three Clues for Responding to Rising Oil Prices

1. Understanding the Derivation and Rebound of This Week’s TACO Trading

From March 10 to March 13, a decline of $30–$40 was an overly arrogant price expression for Iran, which has both the will and the ability, and is currently blockading the strait. Subsequently, in the second half of this week, oil prices recovered, rising from $80 back to $100 per barrel.

2. Outlook: Short-term Oil Prices May Continue to Rise

Continuing with the “Longer until Higher” perspective, we believe that the $100 oil price on Friday still does not fully reflect the current fundamentals, mainly due to Iran’s strong demand for high oil prices and Trump’s “tough position,” unable to quickly compromise with Iran at medium to low oil prices.

In this context, if oil prices reach high levels and high volatility zones as expected, how should we interpret the situation?

Although short-term conflict intensity may continue to escalate, with expectations of the Red Sea blockade, oil facilities, and ground warfare gradually fermenting, we still believe the situation will gradually de-escalate in the medium term.

In the short term, Trump still has motives to take risks and create false pretenses to gain bargaining chips, while Iran has sufficient backup plans to respond to Trump’s provocations. This means oil prices may spike, and the market will continue to face increased trading volatility and risk premiums.

3. How to Capture Investment Opportunities After Oil Prices Surge

In the medium term, the peak of oil prices is hard to define, but the duration may be insufficient, mainly because Trump’s refusal to negotiate and the resistance to expanding conflicts are significant obstacles.

From the resistance perspective, as oil prices rise and daily reports of war damages increase, along with news of military overspending and protests from allied countries, the urgency to control oil prices, stabilize allies, and maintain approval ratings grows. The cost-benefit ratio of expanding conflicts diminishes.

From the motivation perspective, the window for regime change has passed, and the political benefits of continued conflict for the US are no longer present. High-value, low-risk military targets are nearing completion, and military missions are close to finishing. Under the definition of limited-scale warfare, the US no longer has the political or military incentives to prolong the conflict.

In summary, after further oil price increases, regardless of conflict intensity, trading should focus more on the likelihood of successful negotiations. At high oil prices and high volatility, Trump is more likely to make concessions acceptable to Iran, which could become the next “expectation gap” for market tracking and trading after high oil prices.

4. Allocation Recommendations

In the short term, as conflict intensity may continue to escalate and expectations of the Red Sea blockade, oil facilities, and ground warfare ferment, it is recommended to focus on sectors whose prices can link with oil prices and are expected to benefit from rising oil prices.

Reviewing the correlation of absolute/relative returns of various industries with oil prices since 2010, the industries with the strongest positive correlation mainly include: Non-ferrous metals, coal, oil & petrochemicals, chemicals, steel, machinery, new energy, agriculture.

The logic of benefiting from rising oil prices can be summarized into three categories:

• Direct profit enhancement: Rising oil prices directly increase profits in upstream energy-related industries such as crude oil extraction, oilfield services, shipping, providing profit elasticity;

• Energy substitution: Under high oil prices, the economic viability of coal, natural gas, coal chemicals, new energy, biofuels (e.g., soybeans) becomes more prominent, driven by increased demand for energy substitution;

• Cost-driven increases: Rising crude oil prices push up production costs of fertilizers, pesticides, which then transmit to agricultural product planting costs and prices.

In the medium term, as oil prices surge, it is advisable to seek sectors with independent prosperity and less impact from rising oil prices, such as AI and advanced manufacturing, supported by industry trends and policies.

These sectors, after short-term devaluation due to geopolitical risks, are expected to benefit from their relatively stable fundamentals and independent growth, becoming relatively advantageous in a geopolitical risk environment. Based on upward revisions of earnings forecasts since the beginning of the year, focus on:

• AI: Hardware (consumer electronics, components, computing devices, communication equipment, electronic chemicals); Software (gaming, digital media, IT services);

• Advanced manufacturing: New energy (batteries, motors, PV equipment, wind power equipment), military industry (marine and aerospace equipment), machinery (rail transit equipment, specialized equipment, construction machinery), home appliance parts, commercial vehicles, medical services.

Risk Warning

The situation in Iran continues to deteriorate, and global oil prices soar.

Source: Industrial Securities

Risk Disclaimer

Market risks are present; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Invest at your own risk.