Reviewing the six rounds of oil price cycles, Industrial has provided the current trading answer as "dual mainline".

Industrial released a research report, stating that after reviewing the historical six rounds of oil price increases caused by supply shocks, it believes that the core variables determining the subsequent asset prices are still related to the judgment of oil prices and the actual navigation situation in the Strait of Hormuz. In addition, how policies respond to the impact of high oil prices on the economy and the pressure brought by inflation are also key variables determining the trends of subsequent asset prices. For the Federal Reserve, they will be more "torn," while China's policy maneuvering space is relatively larger. This means that faced with high oil prices, the Federal Reserve's subsequent policy choices will be more "torn," and it will also be one of the biggest uncertainties facing the future market. For China, due to the overall controllable domestic inflation pressure, policies will likely continue to focus on "stabilizing growth" and maintaining reasonable liquidity abundance. Policy certainty and ample liquidity environment are expected to become important supports for A-shares to maintain resilience in this round of external shocks. Lastly, based on the current benchmark judgment that "the peak of the conflict intensity may have gradually passed, but oil prices are expected to remain high for a period of time," the bank recommends two strategies: one is to focus on sectors whose prices are linked with oil prices and are expected to benefit from the upward trend of oil prices, including upstream energy-related industries such as crude oil extraction, oilfield service equipment, oil transportation, coal, gas, coal chemical industry, new energy as alternative energy sources, as well as cost-driven price hikes in industries such as fertilizer, pesticides, and Shenzhen Agricultural Power Group. The second strategy is to focus on trading based on domestic circumstances and find sectors that have independent industry trends, less impact from the upward trend of oil prices, and also benefit from potential reversal trades. Sectors with industry trends and policy support such as AI and advanced manufacturing are the most typical areas. The main points of Industrial are as follows: 1. Review of the six historical rounds of oil price increases: To clarify the impact of oil price increases on asset prices, it is necessary to identify the driving logic behind the rise in oil prices in history. The driving logic for the historical increase in oil prices can be classified into three categories: supply shocks (mostly caused by supply chain disturbances due to wars, such as the two oil crises in the 1970s), demand stimulation (typical example is the acceleration of oil demand due to China's industrialization from 2001 to 2007), and monetary easing (typical example is quantitative easing after the financial crisis). Among them, the first category has a negative impact on equity assets, while the latter two, due to the added factors of demand recovery and abundant liquidity, have a positive impact on equity assets. This round of increase in oil prices is a typical driver by supply shocks caused by war. Therefore, Industrial reviews the historical six rounds of oil price increases caused by supply shocks to draw insights for current trading. (a) First Oil Crisis in 1973: At the onset of the war, oil prices surged, U.S. economy entered stagflation, and equity assets followed with a deep adjustment. Oil Price: Rose sharply following the outbreak of the war, and even after the crisis ended, prices remained high. In October 1973, the Middle East war disrupted the oil supply chain. OPEC reduced production and raised prices, while Saudi Arabia and other countries implemented comprehensive oil embargoes against the United States and the Netherlands. Oil prices rose from $2.7 per barrel to a peak of $13 per barrel. After the end of the embargo in March 1974, oil prices did not return to pre-war levels, but stabilized long-term at a high of $10-12 per barrel, due to the transfer of pricing power, supply reconstruction, dollar depreciation, global stagflation, all pushing the oil to a new price center. Overseas Environment: The U.S. economy fell into deep stagflation. The surge in oil prices greatly increased costs for businesses and residents, suppressing consumption and investment. The U.S. economy fell into deep stagflation: negative GDP growth, soaring unemployment rates, CPI exceeding 12%, and PPI exceeding 20%. The Federal Reserve oscillated between combating inflation and stabilizing growth, first raising interest rates significantly, then being forced to lower them, but ultimately failed to prevent a combination of recession and high inflation. Performance of Major Asset Classes: Major stock indices witnessed declines, the U.S. dollar and U.S. bonds initially strengthened due to safe-haven sentiment and rate hikes support, but in the medium to long term, they weakened due to the resonance of restrictive monetary policy and economic stagnation; the stagnation environment combined with the U.S. credit crisis prompted oil and gold to enter a bull market. Performance and Pace of U.S. Stocks: The market began to decline after the outbreak of war in October 1973, then shifted to fluctuations in December; after the crisis ended in March 1974, the market continued to price in the negative impact of rising oil prices on the economy in the medium to long term, resulting in a continued decline. It was not until October that the market experienced a turnaround driven by economic recovery, falling inflation, and Fed rate cuts. Performance of U.S. Industry Sectors: During the market decline, cyclical sectors like finance, real estate, and consumer goods lagged due to economic recession, while defensive sectors like energy, raw materials, telecommunications, utilities, and pharmaceuticals resisted the downturn; during the rebound phase, cyclical sectors showed greater resilience, with energy and raw materials benefiting from long-term premium performance. (b) Second Oil Crisis in 1978: Oil prices again stabilized at a new center, the U.S. economy experienced more severe stagflation, but equity assets maintained a fluctuating upward trend. Oil Price: Rose sharply following the war, continued to rise under sustained supply interruptions, and eventually peaked after two successive surges, gradually returning to fundamentals. In November 1978, the Iran situation escalated, oil workers went on strike, and supply chains were disrupted, leading to an upward trend in oil prices. In February 1979, the change in government in Iran further confirmed the continuity of the supply interruption, causing oil prices to continue to rise, reaching their peak in November due to further escalation of geopolitical risks. With the outbreak of the Iran-Iraq war in September 1980, oil prices surged once again, followed by a second peak in December, but with geopolitical premiums gradually easing, prices returned to supply and demand fundamentals, ultimately confirming a new center of $25-30 per barrel. Overseas Environment: The U.S. economy entered its most severe stagflation phase since World War II, leading to an aggressive tightening by the Federal Reserve to combat inflation at the cost of recession. In the early stages of the crisis, despite a significant rise in U.S. inflation, the economy seemed overheated, and the Fed's monetary policy was mainly observant. By 1980, GDP turned negative, confirming recession, but inflation spiraled out of control under the upward pressure of oil prices. Under the leadership of Volcker, the Fed implemented extreme tightening, with the federal funds rate soaring to nearly 20%, ultimately stabilizing inflation at the cost of recession. Performance of Major Asset Classes: Major stock indices were only impacted in the short term, the U.S. dollar and U.S. bonds weakened after an initial uptick, driven by risk aversion and rate hikes, and the trend continued to be restrained by the shift in monetary policy and economic stagnation; the stagnation, combined with the U.S. dollar credit crisis led to a bull market in oil and gold. Performance and Pace of U.S. Stocks: Unlike the systemic decline seen during the first oil crisis, this time the conflict only briefly impacted U.S. stocks, leading to a stabilization in December; after the crisis ended in March, the market continued to price in the negative long-term effects of rising oil prices on the economy, resulting in further declines until October, when the market rebounded amid economic recovery, lower inflation, and Fed rate cuts. Performance of U.S. Industry Sectors: During the market decline, cyclical sectors like finance, real estate, and raw materials underperformed due to expectations of economic recession, while defensive sectors like energy, materials, and telecommunications fared relatively better; during the rebound phase, cyclical sectors showed different performances, with energy and real estate as the most direct "anti-inflation + profit hedging" types, leading a significant uptrend, thus shielding other industries from profit declines, and being a key factor for the overall stock market to avoid a systemic decline. (c) Third Oil Crisis in 1990: Short-term, weak impact, affecting macroeconomic and asset prices mostly in the short term Oil Price: Fear and supply chain disruptions drove a surge in oil prices, but after the crisis, with supply and demand gradually rebalancing, prices returned most of their gains, without the long-term high oil prices seen in the first two crises. In August 1990, Iraq's full invasion of Kuwait revealed supply gaps, leading to an upward trend in oil prices, peaking at $40 per barrel in October. By December, as the war situation clarified, along with a significant increase in production by Saudi Arabia and continuous strategic oil reserve releases by the IEA, the supply-demand rebalancing led to a rapid decline in oil prices, erasing all the gains since the war began. Overseas Environment: The rapid rise in oil prices did not lead to sustained economic impact, as the U.S. economy experienced a brief recession followed by recovery, and inflationary pressures were manageable. In the early stages of the crisis, the U.S. economy exhibited typical signs of stagflation, with slowing economic growth and increased inflationary pressures. However, the rise in oil prices had not yet transmitted to final consumption, and overall inflation remained relatively moderate, with no signs of uncontrollable inflation observed during the first two crises. The U.S. Federal Reserve maintained a wait-and-see approach to monetary policy and did not turn to tightening. As oil prices continued to rise in late 1990, U.S. GDP growth turned negative, confirming a recession, while inflation peaked. The Fed then began a shift towards easing monetary policy to combat economic downturn pressures. With oil prices falling and loose monetary policy, U.S. economic pressures gradually eased, halting the inflationary trend and bringing the economy back to normal. Performance of Major Asset Classes: Major stock indices weathered short-term shocks, while the U.S. dollar and U.S. bonds initially weakened but strengthened later, led by increasing risk from stagflation and the policy rebound on economic growth; the continued stagflation propelled oil and gold into a major bull market. Performance and Pace of U.S. Stocks: Unlike the systemic decline seen during the first oil crisis, this time the war only briefly impacted U.S. stocks, with the impact limited to 2-3 trading days and a decline of about 2%; however, the spike in oil prices triggered a year-long period clouded by stagflation fears, with the timing of the end of the war becoming the market's high point of the year. Performance of U.S. Industry Sectors: During the market adjustment, sectors like finance, real estate, and industrial materials experienced a downturn due to economic recession expectations, while sectors like energy and utilities showed more resilience. During the rebound, the structure of the market showed clear signs of a "rebound from oversold conditions," with cyclical sectors in the domestic economy anticipated to lead the rebound, and growth sectors such as technology, consumer goods, and health care topping the performance charts. (d) Iraq War in 2003: Buy anticipation, sell reality, asset prices reflect fundamental logic in the medium to long term Oil Price: Prices rose in anticipation of the war, but fell as the conflict persisted, eventually settling at high levels for the year. Oil prices surged in anticipation of the war triggering supply disruptions but dropped as the conflict unfolded. As the war situation reached a stalemate and with slow supply recovery, prices remained high throughout the year. Overseas Environment: The short-term disruptions caused by the rise in oil prices due to the Iraq war had little lasting impact on the U.S. economy in economic turmoil, leading to a significant rebound, but overall, long-term inflation fears were contained; this allowed the Federal Reserve to continue with accommodative policies, ultimately supporting a weak economic recovery. After the war, as oil prices fell and monetary policy eased, the U.S. economy entered an expansion phase, with GDP growth in Q3 2003 reaching the highest quarter-on-quarter increase in nearly two decades. Domestic Environment: Despite a rapid economic recovery following the Iraq conflict, issues such as overinvestment in fixed assets, accelerating producer prices, and tight monetary policy adjustments aimed at cooling the economy became critical. The 2003 economic recovery was strong, indicative of rapid GDP growth with a high double-digit increase, driven by notable acceleration in fixed asset investments. Adding to this, the input-driven inflation caused by rising oil prices led to a higher Producer Price Index compared to the Consumer Price Index. With the economy overheating, investment levels cooled gradually and became the central focus of macroeconomic regulation. By 2003, China began tightening its monetary policy by issuing central bank bills to tighten the money supply through open market operations, while also raising the reserve requirement ratio by 1 percent. Performance of Major Asset Classes: Major global stock indices were impacted in the short term but later stabilized, with U.S. stocks mainly driven by anticipation and buy-ins prior to the war, leading to a year of sideways movement with no significant gains or losses; energy prices surged due to tensions in the Middle East, leading to spikes in other commodities too, while gold saw a modest rise due to hedging against risks. Performance and Pace of U.S. Stocks: U.S. stocks declined initially following the outbreak of the war in November 2002, then rebounded in anticipation of better than expected earnings, data during the first military actions, prior to gradually decoupling from the war sentiment. While economic data improved, the market became desensitized to geopolitical shocks, resulting in only periodic short-term volatility, with the stock market mirroring oil prices. Performance of U.S. Industry Sectors: During the decline period, sectors like financials, real estate, and raw materials were the hardest hit by economic recession expectations, while cyclical sectors regained prominence during the rebound, with raw materials and energy leading the way in inflation buffering and profit hedging, driven by real asset value protection properties in times of high inflation. (e) Libya Civil War in 2011: Oil prices remained high, leading to global economic stagflation, impacting asset prices negatively Oil Price: Prices surged at the onset of the war, then stabilized at high levels as conflict persisted, before gradually decreasing in the second half of the year due to supply and demand factors. The conflict in Libya caused oil prices to spike in Feb 2011, reaching a peak of 126.7 per barrel in April due to supply chain disruptions. As the conflict continued into uncertainty, and OPEC's limited production increases and slow supply recovery took effect, oil prices remained at a high level throughout the year. Overseas Environment: The sharp rise in oil prices due to the war had a brief impact on the U.S. economy, leading to short-term pressures as oil prices drove rapid Producer Price Index inflation forwarded to the Consumer Price Index. However, the U.S. Federal Reserve maintained a zero interest rate policy and further pushed quantitative easing measures. As the conflict subsided, and with the easing of oil prices and monetary policy, the U.S. economy entered an expansion phase, with the GDP growth in Q3 2003 reaching a new high. Domestic Environment: The 2011 global economy faced pressures from overseas oil price shocks and escalating European debt crisis. In the face of these pressures, China's GDP growth returned to double digits, driven by accelerated fixed asset investments. Domestic demand weakened under the intense external pressure, and input-driven inflation fears rose, leading to macroeconomic policies focusing on controlling inflation and cooling the real estate market. Performance of Major Asset Classes: Major global stock indices faced pressures from global stagflation, leading to underperformance in U.S. stocks and bonds, while commodities like oil and gold saw continued growth. Major stock indices shifted as the conflict intensified, with the U.S. dollar weakening in the early stages but strengthening later as the country's economic advantage became evident; this led to a dichotomy in the performance of U.S. and European stocks. Performance and Pace of U.S. Stocks: The turmoil caused by the oil price shock and the European debt crisis in 2011 led to economic decline and inflation pressures in the U.S. The U.S. Federal Reserve initiated easing policies to mitigate these pressures, leading to a weak recovery and gradual repeal of inflation fears. Performance of U.S. Industry Sectors: During the market decline, sectors like finance, real estate, materials, and consumer goods were negatively impacted by the economic downturn, while energy, utilities, and healthcare sectors showed resistance. The overall economic recovery saw a rebound in the commercial sectors, with technology and health sectors at the forefront of the recovery path. (f) Russia-Ukraine Conflict in 2022: High oil prices as a catalyst for the Federal Reserve's aggressive rate hikes, monetary tightening dragging global economy and asset performance Oil Price: The conflict led to an initial oil price surge, stabilizing at high levels as the conflict persisted, and gradually declining in the second half of the year due to supply and demand dynamics. The conflict between Russia and Ukraine triggered soaring energy prices, exacerbating the cumulative inflation pressure since the U.S. epidemic and broke the temporary nature of U.S. inflation, officially starting a tightening cycle in March 2022. In the first half of the year, rising inflation prompted the Federal Reserve to aggressively increase interest rates in response to inflationary pressures, causing a brief economic setback. In the second half, although inflation moderated from its peak, the persistent inflation pressure forced the Fed to maintain an aggressive pace of tightening, leading to a temporary economic downturn. While inflation eased later in the year, it remained sticky, leading the U.S. Federal Reserve to maintain an aggressive stance on rate hikes, resulting in a temporary economic rebound but lacking inherent strength, overshadowing the markets throughout the year with recession concerns. Domestic Environment: Economic growth faced multiple internal and external pressures, weakening domestic demand led by slowing demand, supply shocks, and weakening expectations. The lack of growth drivers in key sectors such as consumption, real estate, manufacturing, and home-building, coupled with external pressures from weak overseas demand, led to a decline in GDP growth. The current trading environment has entered the second phase of reversal trading, with signs that the conflict intensity is gradually declining, leading to stabilization and rebound in global equity assets. The oil prices are expected to remain high for some time and require continued monitoring of their impact on the economy, policy orientation, and asset prices. The core variables to monitor going forward include Iran's stance, Hormuz navigation, and how high oil prices will