Guotai Junan: Oil prices fall and freight rates rise, seize the opportunity for a contrarian layout.

Guotai Junan Securities released a research report stating that restructuring of trade and relocation of refineries to the east have driven a significant increase in oil transportation demand over the past two years, and the inflexibility of oil tanker supply is gradually becoming more prominent. The lack of refinery operation in the off-season of 2024 Q3, along with the pace of trade and oil price fluctuations, will dominate short-term volatility. The recent sharp drop in oil prices has intensified demand concerns, but actual shipping rates are recovering, which may catalyze a reassessment of market perceptions. It is expected that the supply and demand will continue to improve in the coming years, and the prosperity of oil transportation is expected to exceed expectations. It is recommended to lower the seasonal speculation and adopt a contrarian approach to the super bull market options for oil transportation. Key points of Guotai Junan are as follows: Crude oil transportation: The recent drop in oil prices and the rise in shipping rates make it highly unpredictable for the peak season. The off-season of the first half of 2024 is not weak, Q3 demand is trending downward while oil prices remain high, leading to short-term pressure due to insufficient refinery operation. The recent adjustment in the oil transportation sector may be due to concerns about increased demand for crude oil resulting from the sharp drop in oil prices. From January to August 2024, the demand for crude oil transportation continued to grow, with sea freight volumes still increasing compared to 2019, and the restructuring of crude oil trade continued to drive an average increase in average distance by about 10% compared to 2019. Is the drop in oil prices good or bad for oil transportation? The key lies in the reasons for the drop in oil prices. If it is due to increased crude oil production, it will stimulate crude oil consumption, which is good for oil transportation; if it is due to reduced demand for crude oil, it will depend on whether the degree of stimulation from the drop in oil prices can offset the movement of the demand curve. The recent sharp drop in oil prices and the rise in shipping rates may catalyze a reassessment of market perceptions of the impact of oil price declines. The industry generally still believes that crude oil consumption as a traditional energy source is resilient, with organizations like the IEA maintaining a forecast of 1% growth by 2025. Future attention should be given to the pace of production increase at Atlantic China Welding Consumables, Inc., and policies from OPEC+ and the US on crude oil. It is noted that October will enter the traditional peak season, and we believe the peak season is highly unpredictable. Refined oil transportation: Insufficient refinery operation in the off-season, but profitability is still possible at low shipping rates. Panic purchases dominated the prosperity surge in 2022, and in 2023, the relay of relocating refineries to the east ensured high prosperity. In the first half of 2024, high production capacity utilization, combined with the impact of the Red Sea, is expected to set new historical highs in shipping rates. Refined oil transportation demand continues to grow beyond expectations, driven by the ongoing relocation of refineries to the east promoting cross-regional trade growth. Estimated sea freight volumes from January to August 2024 increased by 3% year-on-year, with a 9% increase compared to 2019, and average distances lengthening by over 10% compared to 2019. It is expected that the trend of relocating refineries to the east will continue in the future, with demand for refined oil transportation exceeding expectations, and room for price elasticity opening up. Insufficient refinery operation in the short term has caused pressure, but the trend of relocating refineries to the east and exceeding expected demand growth in the coming years remain unchanged. Oil transportation supply: Shipyard saturation is expected in the coming years, with limited willingness to place orders. 1) Limited order backlog. In the first half of the year, the scale of VLCC tankers did not increase, and the scale of refined oil tankers only increased by 1%. Currently, VLCC/MR on-order percentages are 7.9%/16.8%. 2) The expected return on investment in new shipbuilding is still low, and shipowners have limited willingness to place orders. Shipyards are expected to be fully booked in the coming years, and capacity constraints are firm, leading to high ship prices; environmental regulations are becoming stricter, and selecting new energy sources is challenging; the expected return cycle for new ship investments is expected to shorten; there are differing expectations regarding the future market center price, and there is not a consistent optimistic outlook. 3) The fleet is aging, and phase-out is expected in the future. Over the next two years, the proportion of ships over 20 years old in the tanker fleet is expected to exceed 20%. With stricter environmental regulations and sanctions on shadow fleets, there is a possibility of accelerating the phase-out of old ships. Investment strategy: Seize the opportunity for a contrarian layout of oil transportation and maintain an increase in holdings. Over the past two years, the significant increase in oil transportation demand driven by trade restructuring and relocation of refineries to the east, and the inflexibility of oil tanker supply has gradually become more evident. The lack of refinery operation in the off-season of 2024 Q3, the pace of trade, and oil price dominance will cause short-term fluctuations. The recent sharp drop in oil prices has exacerbated demand concerns, but actual shipping rates are recovering, which may catalyze a reassessment of market perceptions. It is expected that the supply and demand will continue to improve in the coming years, and the prosperity of oil transportation is expected to exceed expectations. It is recommended to lower seasonal speculation and adopt a contrarian approach to super bull market options for oil transportation. Risk factors: Economic fluctuations, geopolitical risks, oil price risks, safety incidents, etc.