Oil: Geopolitical Catalysts Overlap with Fundamental Reversal, Investment Opportunities Emerge

What are the key signals indicating a reversal in AI supply and demand fundamentals?

After discussing gold, let’s analyze the oil market. Looking back at the long-term trend of oil prices, each major cycle is driven by both geopolitical disturbances and changes in supply and demand fundamentals. Past oil crises reveal a common pattern: oil is not only a commodity but also an important tool in geopolitical games. Its price fluctuations in major turning points directly impact global inflation, economic trends, and international power structures. Each oil crisis was catalyzed by geopolitical disturbances.

Data source: Tianfeng Securities

Risk warning: Institutional research opinions are for reference only and do not constitute investment advice or promises. They are not the basis for investors to choose specific products, nor do they constitute stock recommendations.

For example, the first oil crisis in 1973 was triggered by the Yom Kippur War, initiated by Egypt and Syria against Israel. At that time, oil prices surged sharply, many economies suffered heavy losses, and the Netherlands even returned to bicycle travel due to oil shortages. The second oil crisis occurred in 1978, and the outbreak of the Iran-Iraq War in 1979 caused conflicts between these two major oil producers, leading to a significant reduction in global oil supply and a sharp rise in prices, triggering a worldwide economic downturn. U.S. inflation spiraled out of control, forcing the Federal Reserve to raise interest rates, which heavily impacted the global economy. During this phase, oil prices had no ceiling and had considerable upside potential. The third crisis appeared around 1990, caused by the Gulf War following the invasion of Kuwait by the US and Iraq. The market had some experience by then, so prices did not surge dramatically but remained highly volatile. The fourth major increase in oil prices occurred in this century, mainly driven by demand. The rise of emerging Eastern economies led to a surge in global oil demand, pushing prices higher rapidly.

We will not analyze or judge the current geopolitical disturbances in detail, but their positive impact on oil prices is evident and ongoing, with no signs of fading. Reviewing the past five years of oil prices shows they have always been influenced by a complex interplay of supply and demand, geopolitical conflicts, and energy transition factors. Short-term spikes and volatility are mainly driven by geopolitical conflicts. In our February investor roadshow, we pointed out that investing in the oil sector at that time was akin to buying bullish options on oil prices. When prices rise, the sector benefits from both market sentiment and fundamentals, creating good investment opportunities. From today’s perspective, oil prices still have room to rise, and the oil sector will continue to benefit from rising prices, driven by industry prosperity and market enthusiasm.

Data source: China Industrial and Commercial Bank of China (Asia) Southeast Asia Research Center

Risk warning: Institutional research opinions are for reference only and do not constitute investment advice or promises. They are not the basis for investors to choose specific products, nor do they constitute stock recommendations.

If we set aside geopolitical factors and look at a broader macro perspective, during Kondratiev depression periods, commodities generally present two major investment opportunities. The first appears during Kondratiev prosperity phases, lasting about 10 to 15 years, mainly driven by demand. This is why markets often see a cycle of first speculating on precious metals, then industrial metals, followed by petrochemicals, and finally agricultural products. This pattern reflects a shift from trading recession to genuine demand-driven trading, which was the core logic at the time. The current market is actually trading the Kondratiev depression phase, during which commodities also present significant investment opportunities because the dominant country’s monetary credit shows cracks, enhancing the monetary attributes of commodities.

From relevant data charts, we see that since 2016, the proportion of U.S. Treasuries in global foreign exchange reserves has continued to decline, while gold’s share has steadily increased. As a globally priced commodity, oil is also traded based on the logic of monetary credit cracks. Therefore, on a larger scale, this year’s oil market has the potential for a spectacular rally.

Source: Wind, World Gold Council, Western Securities R&D Center

Risk warning: Institutional research opinions are for reference only and do not constitute investment advice or promises. They are not the basis for investors to choose specific products, nor do they constitute stock recommendations.

Now, let’s discuss more specific fundamentals. From a supply and demand perspective, many investors have heard about oversupply. We now need to examine whether this oversupply narrative still holds true. Over the past year, especially throughout 2025, the market has repeatedly cited forecasts from relevant institutions, generally believing that the oil market will be oversupplied in 2026. However, according to a Barclays report, model calculations show that current onshore commercial inventories, floating storage, and in-transit crude oil are all below the levels suggested by the model. In other words, actual data do not support the oversupply judgment. The only explanation is that China has been continuously replenishing inventories last year, but even this alone cannot fully explain where the supposed oversupply has gone. After years of market trading, the oversupply narrative is likely nearing its end, and a turning point in trading may occur this year. While this narrative is difficult to confirm or refute quickly, the potential for a turning point exists.

Inventory data also supports this view. Over the past decade, global capital expenditure in oil has continued to shrink, with a slight rebound during the Russia-Ukraine conflict in 2022, but oil inventories and strategic reserves remain low. Both U.S. commercial crude oil inventories and strategic petroleum reserves are at low levels. Moreover, the U.S. has been slow in replenishing reserves, which are at their lowest in 40 years. Some investors may recall that before President Trump took office, he announced plans to fill the U.S. oil reserves, but no significant actions have been seen so far.

Regarding China’s oil stockpiling, in 2025, China’s oil reserves increased rapidly, and since 2024, the pace of stockpiling has accelerated. The main reasons include: first, last year’s low oil prices created an excellent window for low-cost stockpiling; second, oil’s strategic importance makes increasing reserves highly significant for China. There are reports suggesting that China’s actual reserves may have already exceeded previous official strategic reserve capacity, especially after the past two years of stockpiling, with a significant increase in strategic reserves. China also has room for further expansion of its strategic reserves.

Beyond supply and demand narratives, from a stockpiling perspective, oil prices still have upward support. In the short term, geopolitical disturbances are the main driver, with market sentiment leading the way. The entire oil sector benefits from the positive sentiment generated by rising prices. Additionally, from a calendar perspective, oil prices tend to strengthen in the first and second quarters. While crude oil has no fixed seasonal pattern, historical data shows a tendency for prices to rise during these periods. This is likely because geopolitical disturbances often occur early in the year, and many countries start planning their stockpiling at that time, providing a quick catalyst for price increases. Based on current trends, short-term sentiment and long-term supply-demand fundamentals suggest that there are still investment opportunities across the entire oil industry chain.

It is also clear that current market speculation is not targeting individual stocks but rather the sector beta or the broader asset class beta. Therefore, investing via ETFs is a convenient and cost-effective approach. Investors are advised to consider ETFs that cover the entire oil and gas industry, such as the Oil ETF (561360), which tracks the CSI Oil & Gas Industry Index, covering upstream, midstream, and downstream segments. This ETF benefits from rising oil prices and industry prosperity.

Data source: Wind, CSI Index, as of 2026/3/16. Risk warning: Sector weights may change with index component adjustments. Market fluctuations are for reference only and do not constitute stock recommendations.

There are several other oil sector indices, including Oil & Gas Resources and China Securities Oil & Gas Index. Historical data since inception shows that the CSI Oil & Gas Industry Index has outperformed similar indices, especially during periods of rising oil prices, offering better elasticity and providing investors with a more effective tool to capture industry prosperity.

Risk warning:

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The above views are for reference only and do not constitute investment advice or promises. If you wish to purchase related fund products, please follow relevant investor suitability regulations, conduct risk assessments in advance, and choose funds matching your risk tolerance. All investments carry risks; please invest cautiously.

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