Guotai Junan: Future oil transportation supply and demand expected to be better than expected, risk-return ratio is attractive.

Guotai Junan released a research report stating that the impact of geopolitical factors on oil prices in the next two years may weaken, and the global oil production is expected to enter a growth cycle, with OPEC+, South America, and North America expected to gradually increase production, driving growth in crude oil trade. It is expected that the future oil supply and demand will be better than expected, and there is downside protection for oil prices. The market is expected to recover from its low levels, with dividend support limiting valuation downside risks, making the risk-reward ratio more attractive. The focus is on changes in geopolitical situations and counter-trend opportunities. Event: According to the bank's statistics as of early 2025, there are about 274 oil tankers sanctioned by the US Department of the Treasury's OFAC, including 202 crude oil tankers, equivalent to about 6% of the global crude oil tanker capacity (DWT); of which 66 are VLCC tankers, equivalent to over 7% of the total VLCC capacity (DWT). The bank finds it difficult to determine the authenticity and follow-up enforcement of the related controls. The industry believes that strengthening port management is logical and will help port operations comply with regulations, avoiding potential legal risks and economic losses. Key points of Guotai Junan's main view: Background: The oil shipping industry experienced a stress test in the second half of 2024, and increased Iranian oil exports may divert shadow fleet to compliant market cargo. The oil shipping market went from prosperous in the front half of 2024 to declining in the back half, experiencing pressure in the second half of the year, with Q4 peak season not being strong. The bank believes there are two main reasons for this: 1) Geopolitical oil prices. Under economic fluctuations, crude oil demand weakens, while geopolitical conflicts still dominate the slow decline in oil prices, leading to pressure on refinery profits and a significant year-on-year decline in utilization rates. 2) Changes in trade structure. In the second half of 2024, Middle East crude oil exports remained flat year-on-year, with accelerated growth in Iranian exports leading to the diversion of shadow fleets to compliant market cargo. According to Kpler data, sanctioned oil tankers continue to carry Iranian oil exports, playing a key role in the increased Iranian oil exports over the past year. Impact: Stricter sanctions on shadow fleets may help restore compliant market cargo and reduce effective tanker capacity. In the past two years, the United States has gradually strengthened sanctions on shadow fleets, identifying and specifically sanctioning shadow fleets involved in illicit trades with Iran, Russia, Venezuela, and other countries. On December 3, 2024, the United States again sanctioned 35 companies and vessels (19 ships) related to Iranian shadow fleets, stating that oil revenues provide Iran's regime with resources to support its nuclear program, develop advanced drones, and missiles. Currently, nearly half of the sanctioned oil tankers by the US Department of the Treasury OFAC are related to Iran. Observing high-frequency Kpler data, concerns about potential risks of increased US sanctions on Iran have led to a reduction in Iranian oil exports in recent weeks. It is expected that stricter sanctions on shadow fleets will constrain their operating space, reduce the efficiency of old tanker operations, aid in the recovery of compliant market cargo, and accelerate the dismantling of old ships. The future oil supply and demand are expected to be better than expected, with the risk-reward ratio becoming more attractive, and the bank maintains its recommendation to increase holdings. The rigidity of oil tanker supply is expected to continue in the coming years, with stricter sanctions likely to further reduce effective tanker capacity. The decline in oil shipping industry sentiment in the second half of 2024 exacerbated demand concerns. The bank believes that oil shipping demand is still expected to continue to grow, as traditional energy demand remains resilient and increased oil production will benefit the growth in oil shipping demand. The impact of geopolitical factors on oil prices in the next two years may weaken, with the global oil market expected to enter an oil production growth cycle, and industry expectations are that OPEC+, South America, and North America will gradually increase production, driving growth in oil trade. It is expected that the future oil supply and demand will be better than expected, with downside protection for oil prices. The market is expected to rebound from its low levels, with dividend support limiting valuation downside risks, making the risk-reward ratio more attractive, focusing on changes in geopolitical situations and counter-trend opportunities. Risk warnings: Economic fluctuations, geopolitical situations, unexpected implementation of environmental policies, safety accidents.