Guotai Junan: OPEC boosts production, oil prices fall, reaffirming benefits for oil transportation and aviation.

Guotai Junan released a research report stating that OPEC+ announced that it will increase production as scheduled in April 2025, marking the transition from a period of decreasing oil production to increasing oil production, with the potential for a downward trend in oil prices. It reiterated that the increase in oil production will benefit oil transportation and aviation, and suggested options for oil price declines. The firm stated that it maintains a "buy" rating for oil transportation and aviation. 1) Oil transportation: In the coming years, the supply will remain robust, and the increase in oil production is seen as beneficial. The balance of supply and demand in oil transportation is expected to be better than expected, with the option of benefiting from a decline in oil prices. Attention should be paid to demand surprises and opportunities provided by geopolitical situations. 2) Aviation: The long-term logic is emphasized, with expectations of profitability increasing in the next two years. The trend of supply and demand recovery in 2025 is confirmed, and with oil prices declining, ticket prices are expected to rise, which will accelerate the recovery of profitability and lead to optimistic market expectations. Key points from Guotai Junan: OPEC+ is set to increase production as scheduled, marking the beginning of a global oil production growth cycle with prospects for a downward trend in oil prices. Recently, OPEC+ announced that it will gradually increase production starting in April 2025, with the goal of completing a 2.2 million barrels per day increase by the end of September 2026, returning to the levels before the voluntary reductions in 2023. This is the first confirmed increase after three consecutive postponements in the past year, indicating a shift from a period of decrease in global oil supply to an increase. The cumulative effect of multiple OPEC+ cuts since October 2022 to maintain high oil prices is estimated to have reduced global oil production by about 4%. Decreasing share of OPEC+ due to cuts, U.S. President Trump demanded lower oil prices or accelerated production. If the increase in production proceeds as planned, static calculations show that global oil production in 2025-26 will increase by 0.5%-2% compared to 2024. Additionally, regions such as South America, North America, and Africa are also expected to increase production in the coming years. The industry expects that the increase in production will drive the downward trend of oil prices. Oil transportation: Reiterating that the increase in production benefits oil transportation, and suggesting options for oil price declines in the first half of 2022-24, oil transportation has experienced significant uptrends in the face of multiple OPEC+ production cuts. In the second half of 2024, geopolitical factors suppressed oil prices, leading to a stress test for oil transportation. Based on past experiences, the market interprets a decline in oil prices as a sign of weak crude oil demand. Is a decline in oil prices positive or negative for oil transportation? The core issue lies in the reasons for the decline in oil prices. The firm reiterated that the increase in oil production will benefit the demand for oil transportation, as the decrease in oil prices resulting from the increase in production will ensure that the increase in production leads to growth in crude oil exports and oil transportation. Additionally, regions such as South America, North America, and Africa are expected to increase production in the next two years, and the longer distances to Asia compared to the Middle East will further benefit the growth in oil transportation demand. At the same time, options for a decline in oil prices are suggested. The inverted futures and spot prices in the past two years have led to unrealized expectations of inventory replenishment. Currently, global crude oil inventories remain low, and a downward trend in oil prices is expected to drive inventory replenishment. If the futures and spot prices for oil show an increase of $6-7 per barrel, or trigger floating storage arbitrage, unexpected demand and stronger-than-expected performance may be seen. Aviation: With the decline in oil prices, ticket prices will rise, and profitability may accelerate. Fuel accounts for nearly 40% of the operating costs of airlines. The firm suggests that the actual impact of oil price fluctuations on airline profitability depends on supply and demand. Over the past two years, the recovery of supply and demand in the aviation industry has been ongoing, with high oil prices hindering the recovery of profitability. Considering the continued trend of recovery in aviation supply and demand in 2025, and the consensus of airlines that ticket prices will increase, it is expected that a decline in oil prices will assist in the recovery of airline profitability and lead to an upward trend in profitability. It is estimated that after the Lantern Festival in 2025, domestic ticket prices including oil will increase year-on-year, and in the first quarter of 2025, domestic aviation fuel prices from the factory are expected to decrease by around 10%. Risk warning: Risks include economic fluctuations, geopolitical situations, oil price risks, safety accidents, etc.