Abstract: The commercial discoveries of oil and gas have not been made in South Yellow Sea Basin since the oil and gas exploration work. There is still insufficient understanding of the source and resource potential of Nanwu Sag, and the favorable zones and exploration directions are still unclear. In response to this issue, this article uses new drilling data and surrounding geological data to systematically evaluate the organic matter abundance, maturity, and other hydrocarbon source indicators of the source rocks in Nanwu Sag. TSM basin simulation is used to analyze the potential of oil and gas resources, select favorable exploration zones, and clarify the reservoir formation conditions and key elements of key zones. The research has found that the Funing Formation of the Paleocene in Nanwu Sag is the main source rock, which is a saltwater lacustrine sedimentary system affected by marine invasion. It develops medium to good, low maturity to mature source rocks, and the main type of kerogen is II₂ type. The resource scale of the depression is 226 million tons, and the near hydrocarbon generation center in the northern slope of the research area is the advantageous direction area for oil and gas transportation and the most favorable exploration zone. And the structural ridge is the oil and gas enrichment zone. The research results have important theoretical guiding significance for the next exploration in Nanwu Sag.