Energy Industry Outlook and China's Response Strategy Amid Middle East Geopolitical Tensions

The geopolitical tensions in the Middle East have drawn close market attention to the outlook for oil prices and the energy industry. Due to escalating conflicts in the Middle East and threats to shipping through the Strait of Hormuz, Brent crude oil prices temporarily surged past $100 per barrel, reaching DBS Group’s worst-case scenario estimate. As long as disruptions to tanker transportation and export terminals persist, oil prices are likely to remain above $100 per barrel in the short term.

However, for oil prices to spike to $200 per barrel, more severe scenarios would need to occur, such as a prolonged closure of the Strait of Hormuz or large-scale destruction of Persian Gulf export infrastructure. This could reduce global crude and refined product supplies by 15 to 20 million barrels per day. Although Iran has hinted at such possibilities, historical experience shows that sustained prices above $120 to $150 per barrel tend to quickly trigger demand destruction and prompt OPEC oil producers to increase output, thereby boosting supply.

From an investment perspective, the performance of the energy sector currently lags behind the rise in oil prices, reflecting investor caution about whether this upward trend can continue. However, if oil prices can stabilize above $100 per barrel, earnings forecasts for upstream producers and integrated large energy companies could be significantly revised upward, as they benefit from strong operational leverage in a high-price environment.

Regarding the impact of rising oil prices on China, the tense Middle East situation has indeed reintroduced a geopolitical premium into the crude oil market, raising concerns about Asian countries being vulnerable to rising energy costs. However, China appears better equipped than other Asian nations, thanks to an increasing share of non-fossil fuel energy in its energy mix, long-term liquefied natural gas (LNG) contracts with Persian Gulf producers, and imports of pipeline natural gas from other suppliers. China also maintains substantial strategic petroleum reserves and commercial inventories, sufficient to cover 100 to 120 days of consumption, providing a buffer against temporary supply disruptions. Additionally, moderate inflation offers policymakers more room to absorb higher energy costs without abrupt policy responses.

Structurally, China’s expanding renewable energy sector and electrification of transportation have reduced its sensitivity to oil prices, making its economic growth less affected by oil price cycles than in past decades. Nonetheless, risks remain. Continued oil price surges could pressure profits in transportation, chemicals, and manufacturing sectors, and broader energy shocks that slow global economic growth could impact China’s export cycle. However, China’s relative market resilience suggests its capital markets may be better positioned than other Asian countries to withstand current market turbulence.

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