Huayuan Securities: The West's sanctions against Russia go against consensus, Russian oil returning to Europe is good news for VLCC.

Huayuan Securities released a research report stating that on January 10, 2025, the United States government imposed the strictest sanctions on Russian oil, directly sanctioning downstream oil trade ports, targeting key nodes in the trade chain. If the sanctions on Russian oil are lifted, it is expected that Russian oil will return to the European market with closer transportation distances. In the background of non-OPEC+ countries continuously increasing production, it is expected that they will shift towards the continuously growing demand in the Asian market, especially in South Asia, to fill the gap left by Russian oil, with both quantity and distances increasing, and VLCC suitable for long-distance transportation. If Russian oil becomes compliant, it may benefit the overall crude oil shipping fundamentals by 5.5%, with VLCC fundamentals benefiting by 9.1%. Huayuan Securities' main viewpoints are as follows: The Russia-Ukraine conflict triggers Western sanctions, reshaping crude oil trade with Russian oil flowing east After the outbreak of the Russia-Ukraine conflict on February 24, 2022, the West imposed sanctions on Russian oil, leading to a significant restructuring of the global crude oil trade pattern. The sanctions from Europe and America forced Russian oil to significantly reduce exports to Europe, prompting Russia to export crude oil to South Asia and East Asia through a combination of actively lowering prices and using mainly small and medium-sized ships, increasing Asian maritime exports by 2.05 million barrels per day. Meanwhile, Europe, which relies on Russian oil imports, will shift import demand to North America, South America, West Africa, the Middle East, and other regions. High oil prices stimulate increased production at Atlantic China Welding Consumables, Inc., while the supply gap in Europe leads to "Western oil, Western transportation" Western sanctions have pushed up oil prices, accelerating production in non-OPEC regions such as North America, Latin America, and West Africa by 1.78 million barrels per day from 2022 to 2023 to fill the supply gap in Europe. Meanwhile, the United States has been releasing strategic crude oil reserves since May 2022 to keep oil prices under control, resulting in an increase of 540,000 barrels per day in U.S. exports to Europe, with over 70% of this incremental oil flow heading to Europe. The oil trade restructuring is transmitted to the maritime sector where Western sanctions have led to a lengthening of the distance for transporting Russian crude oil, benefiting small oil tankers, while VLCC demand is limited due to "Western oil, Western transportation restrictions. More of the non-OPEC production's crude oil is being transported to Europe by small ships, and the limited increase in demand for shipments to Asia weakens the growth in demand for VLCC "Western oil, Eastern transportation". Shadow fleets maintain Russian oil exports, with a large amount of old transport capacity being revitalized After the outbreak of the Russia-Ukraine war, Western countries imposed multiple rounds of sanctions on Russian crude oil exports, restricting Russian oil exports. Among them, on January 10, 2025, the U.S. government imposed the strictest sanctions on Russian oil, directly targeting downstream oil trade ports, striking key nodes in the trade chain. Russia has purchased a large number of aging oil tankers from the second-hand ship market to form shadow fleets to bypass Western sanctions. The Russian oil shadow fleet consists mainly of vessels over 15 years old, especially those over 20 years old, which were almost unused before the sanctions. Since the sanctions, the Russian oil shadow fleet has accumulated a large amount of old transport capacity awaiting disposal. If Russian oil compliance allows a return to Europe, it may strengthen the VLCC "Western oil, Eastern transportation" route If the sanctions on Russian oil are lifted, it is expected that Russian oil will return to the European market with closer transportation distances. In the background of non-OPEC+ countries continuously increasing production, it is expected that they will shift towards the continuously growing demand in the Asian market, especially in South Asia, to fill the gap left by Russian oil, with both quantity and distances increasing, and VLCC suitable for long-distance transportation. According to estimates, if Russian oil becomes compliant, it is expected to affect global crude oil production by 3.98 million barrels per day (including Russian oil pipeline oil volume), reduce the average shipping distance by 4%, and reduce global maritime demand by 0.6%. VLCC maritime demand is boosted by 9.1% due to a large amount of "Western oil, Eastern transportation". Suezmax and Aframax maritime demand weakens by 22.2% due to the decrease in quantity and distance. If Russian oil becomes compliant, the old shadow fleets may withdraw from the maritime market in neutral calculations, leading to a 6.1% reduction in total crude oil tanker capacity, mainly affecting old Suezmax and Aframax tankers (reduction of 15.7%). Overall, if Russian oil becomes compliant, it may benefit the overall crude oil shipping fundamentals by 5.5%, with VLCC fundamentals benefiting by 9.1%. Investment recommendations With the continuous improvement of the oil shipping fundamentals, if Russian oil compliance continues without change, it is advised to pay attention to China Merchants Energy Shipping (601872.SH) and COSCO Shipping Energy Transportation (600026.SH); Maritime prosperity cascades to the upstream shipbuilding industry chain, so it is recommended to pay attention to China CSSC (600150.SH), China Shipbuilding Industry Group Power (600482.SH), and Guangdong Songfa Ceramics (603268.SH). Risk factors Changes in the sanctions on Russia and Iran, Chinese economic growth falling below expectations, the Federal Reserve failing to cut interest rates as expected, economic sanctions and export controls, and environmental protection regulations in the industry failing to meet expectations.