Guotai Junan Securities: Falling oil prices lead to rising freight rates. Seize the opportunity for a contrarian layout.

Guotai Junan Securities released a research report stating that the off-season in the first half of 2024 is not weak, with weakening demand in Q3 and high oil prices leading to short-term pressure due to insufficient refinery capacity. Trade rhythm and oil prices dominate short-term volatility. The recent adjustment in the oil shipping sector may be due to concerns about increased crude oil demand stemming from a sharp drop in oil prices, while actual shipping rates are rebounding, potentially catalyzing a market perception correction. The industry generally believes that crude oil consumption as a traditional energy source is resilient, with organizations like the IEA maintaining a forecast of 1% growth in 2025. It is expected that the supply and demand will continue to improve in the coming years, and the prosperity of oil shipping will exceed expectations. It is recommended to lower the peak-season gamble and position contrarily in the super bull market for oil shipping. Crude Oil Shipping: Recently, oil prices have fallen and shipping rates have rebounded, making it difficult to predict peak season heights. The off-season in the first half of 2024 is not weak, with weakening demand in Q3 and high oil prices leading to short-term pressure due to insufficient refinery capacity. The recent adjustment in the oil shipping sector may be due to concerns about increased crude oil demand due to a sharp drop in oil prices. From January to August 2024, crude oil shipping demand continued to grow, with maritime volumes still growing positively compared to 2019, and the restructuring of crude oil trade continues to drive an average distance increase compared to 2019. Is the drop in oil prices good or bad for oil shipping? The key lies in the reasons for the drop in oil prices. If it is due to increased production, it will stimulate crude oil consumption and benefit oil shipping; if it is due to reduced demand for crude oil, it will depend on the extent to which the drop in oil prices can offset the movement of the demand curve. The recent sharp drop in oil prices and rebound in shipping rates may catalyze a correction in market perception of the impact of falling oil prices. The industry still generally believes that crude oil consumption, as a traditional energy source, is resilient, with organizations like the IEA maintaining a forecast of 1% growth in 2025. It is recommended to focus on the pace of production increase at Atlantic China Welding Consumables, Inc., as well as OPEC+ and US oil policies. It is noted that October will enter the traditional peak season, with Guotai Junan Securities believing that the peak season heights are difficult to predict. Refined Oil Shipping: Insufficient refinery operation in the off-season, low shipping rates are still profitable. Panic buying dominated the prosperity surge in 2022, with refineries relocating to the east in 2023 to ensure high prosperity. In the first half of 2024, high capacity utilization, combined with the impact of the red sea, has once again set historical highs for shipping rates. Refined oil shipping demand continues to grow beyond expectations, driven by continued refinery relocation promoting cross-regional trade growth. It is estimated that from January to August 2024, maritime volumes increased by 3% year-on-year, with a 9% increase compared to 2019, and the average distance traveled compared to 2019 has increased by more than 10%. It is expected that the trend of refineries relocating to the east will continue, the growth in demand for refined oil shipping will exceed expectations, and the potential for shipping rate elasticity will be unlocked. The insufficiency of refinery operation in the short term has put pressure, but the trend of refinery relocation and the growth in demand beyond expectations will not change in the coming years. Oil Shipping Supply: Shipyards will be saturated in the coming years, with insufficient willingness to order new vessels. 1) Limited order book. In the first half of the year, the scales of VLCC crude oil tankers have not increased, while refined oil tanker scales have only increased by 1%. Currently, the proportion of orders for VLCC/MR tankers is 7.9%/16.8%. 2) The expected return on new vessel investments remains low, and shipowners have insufficient willingness to order new vessels. Shipyards will be saturated in the coming years with firm capacity constraints and high vessel prices; environmental regulations are becoming stricter, while there are difficulties in selecting new energy sources; the expected payback period for new vessel investments is shortened; there are differing expectations on the central shipping rates, and there is no consistent optimism. 3) The fleet is aging, and eventual phasing out is expected. Over the next two years, the proportion of vessels older than 20 years is expected to exceed 20%. Environmental regulations and sanctions on shadow fleets are expected to accelerate the phasing out of old vessels. Investment Strategy: Seize the opportunity for a contrarian layout in oil shipping and maintain an increase in holdings. Over the past two years, the restructuring of trade and refinery relocation have driven a significant increase in oil shipping demand, with the rigid supply of oil tankers gradually becoming apparent. The off-season in Q3 2024 due to insufficient refinery operation, coupled with trade rhythm and oil price dominance, will lead to short-term volatility. The recent sharp drop in oil prices has exacerbated demand concerns, but as actual shipping rates rebound, it may catalyze a correction in market perception. It is expected that supply and demand will continue to improve in the coming years, and the prosperity of oil shipping will rise and continue to exceed expectations. It is recommended to lower the peak-season gamble and position contrarily in the super bull market for oil shipping. Risks: Economic volatility risk, geopolitical risk, oil price risk, safety accidents, etc.