Galaxy Securities: Industry Survival Rules and Investment Mapping under the Impact of High Oil Prices

Guotai Junan Securities released a research report stating that geopolitical conflicts affect A-shares through the increase in oil prices and a decrease in risk appetite. In the short term, geopolitical conflicts are driving up oil prices and inflation expectations, suppressing global risk appetite and disrupting A-share valuations, leading the market into a volatile pattern. In the medium term, the impact of oil prices on A-shares is mainly transmitted through four channels: industrial cost transmission, where upstream oil and gas exploration, oilfield services, and oil transportation benefit, while profits in refining, aviation, and high energy-consuming manufacturing industries are under pressure; energy substitution effects, where high oil prices improve the economics of new energy and electric vehicles, driving the development of industries such as wind power, photovoltaics, energy storage, and power batteries; trade and inventory cycle changes, where there is an increase in demand for oil transportation and opportunities for chemical exports substitution; and defensive and independent industry cycle sectors show relatively stable performance, such as communication, banking, and pharmaceutical industries which are less directly affected by oil prices. This surge in oil prices is essentially driven by the strategic premium brought about by geopolitical conflicts. Looking at the pricing mechanism, crude oil prices are determined by a triple logic of commodity properties, strategic properties, and financial properties. The commodity properties mainly reflect the global supply and demand situation and inventory changes, forming the core basis of oil prices in the medium to long term. The strategic properties stem from energy security and geopolitical games, factors such as the situation in the Middle East, risks in the Strait of Hormuz, and policy coordination of oil-producing countries can raise risk premiums by changing expectations on supply security; financial properties are reflected in the disturbance caused by the US dollar system and global liquidity environment on the pricing of commodities. Currently, in a global environment where overall supply is relatively loose and demand recovery is still limited, the rise in oil prices more reflects the re-pricing of strategic properties brought about by geopolitical conflicts, rather than traditional commodity cycle drivers. Under the impact of high oil prices, the energy sector in US stocks benefits the most at both the market and profit ends, while sectors such as finance, discretionary consumption, and industrials usually face pressure. Looking at market trends, events such as the Gulf War in 1990, conflict in Libya in 2011, Iran nuclear crisis in 2011, and Russia-Ukraine conflict in 2022 have in varying degrees driven up international oil prices and had interim effects on the trend of US stock sectors. (1) When major energy supply shocks coincide with rising inflation in the market, as seen in the Gulf War in 1990 and the Russia-Ukraine conflict in 2022, the energy sector often stands out, while cyclical and high valuation industries such as finance, discretionary consumption, industries, and information technology usually face pressure; defensive sectors like utilities, daily consumption, see relatively limited declines. After reaching a temporary peak in oil prices, growth and cyclical sectors with significant declines usually show more pronounced rebounds. (2) If conflicts occur during an economic recovery period, as was the case during the Libya conflict in 2011 and the Iran nuclear crisis period in 2011, the rise in oil prices is more driven by global demand recovery and resonance in the commodity cycle, with no significant systemic decline in US stocks overall. Defensive industries such as health care, daily consumption, utilities tend to have stable performances, while some cyclical industries still achieve certain gains. (3) In terms of profit transmission, high oil prices have a significant impact on corporate profits through the cost side. The energy industry, as product prices rise with the increase in oil prices, usually improves gross profit margins significantly; most of the materials industry can benefit from rising prices of upstream products. On the other hand, downstream industries like industrials, daily consumption, often face margin squeeze as rising costs limit their pricing power, whereas industries like information technology, communication services have relatively limited direct impact from oil prices. Under the impact of high oil prices, A-share upstream resource sectors benefit more at both the market and profit ends, while downstream manufacturing, transportation, and some consumer industries typically face greater pressure. (1) In terms of market performance, three rounds of events, the Libya war in 2011, the Iran nuclear crisis in 2011, and the Russia-Ukraine conflict in 2022 had different impacts on A-shares: if the rise in oil prices mainly reflects supply shocks, sectors like coal, non-ferrous metals, steel, and basic chemicals in upstream resources and cyclical sectors often show signs of strength, while growth, discretionary consumption, and some manufacturing sectors are relatively under pressure. Taking the Russia-Ukraine conflict in 2022 as an example, coal saw significant outperformance during the oil price increase phase, while sectors like electronics, computers, home appliances, automobiles, and non-banking financials saw more noticeable adjustments; after the oil price peak, the market style typically shifts towards manufacturing, consumption, and growth recovery. (2) If geopolitical conflicts reflect more macroeconomic risk disturbance rather than a sustained energy supply shock, then the extent to which A-share industries are affected by oil price movements is relatively limited. During the Libya war in 2011, resource and some cyclical sectors were temporarily outperforming, but most industries went through a correction after the oil price peak; during the Iran nuclear crisis in 2011, the resource sector did not show sustained strength, and midstream manufacturing and technology, media, and telecoms (TMT) were more visibly pressured, indicating that the market was more driven by macro-environment and risk appetite rather than a singular energy theme. (3) In terms of performance, upstream oil and gas exploration, coal, and other resource industries benefit most directly, with gross profit margins usually improving significantly, while midstream processing and manufacturing sectors such as refining, chemical fibers, black metal smelting commonly face profit pressure due to rising raw material costs, with overall limited fluctuation in downstream consumer industries. (4) Looking at industrial enterprise profits, during periods of high oil prices, profits tend to concentrate up the industry chain towards resource extraction. Upstream industries such as petroleum and natural gas extraction and coal benefit the most, while middle stream raw-material processing and manufacturing industries generally face cost pressures, and downstream consumer industries remain relatively stable but with internal variations. (5) From an input-output perspective, industries such as petroleum and petrochemicals, transportation, basic chemicals, building materials, non-ferrous metals show higher exposure to crude oil costs, making them more susceptible to cost increases due to rising oil prices; in comparison, industries with higher added value manufacturing such as electronic devices, computer hardware, batteries have lower dependency on crude oil and are less directly affected by oil price shocks.