Guotai Haitong: Dividend support the valuation floor for oil shipping stocks, and the geopolitical situation does not change the long-term logic.

Guotai Haitong published a research report stating that the Middle East situation has undergone three stages of change in the past six months, with oil transportation demand decreasing while freight rates remain high. Dividend support sets the lower valuation limit, and the geopolitical fluctuations do not alter the long-term logic; the lifting of sanctions on Iran is expected to create a highly prosperous and sustainable compliant market. The recurring geopolitical issues do not change the long-term logic of oil transportation, hence maintaining an 'overweight' rating on oil shipping. The main points from Guotai Haitong are as follows: First Stage (March-June 2026, closure of the Strait of Hormuz) Oil transportation demand decreased as regional chaos drove up freight rates. In late February, conflicts erupted between the U.S., Israel, and Iran, leading to Iran's blockade of the Strait of Hormuz. The volume of tanker traffic through the strait was reduced by over 80%, while Saudi oil exports from Yanbu increased nearly fourfold; however, Middle Eastern crude oil exports still decreased by more than half. Meanwhile, exports from the U.S. Gulf and South America surged by over 30%, and Russian oil benefitted from temporary sanctions relief, increasing production by nearly 20%, yet still struggled to fill the gap left by the Middle East. It is estimated that global oil shipping volume decreased by about 11% year-on-year, and although shipping distances lengthened, oil transportation demand (ton-miles) still shrank. Risk premiums from war, rush shipments, and regional supply-demand disorders drove initial freight rates to spike, which later fell as the disturbances eased. It is estimated that Q2 performance corresponds to a VLCCTCE of $120,000 to $140,000, and China Merchants Energy Shippings tanker profits increased by 2.6 times year-on-year. Second Stage (Mid-June to Early July 2026, brief restoration of passage through the Strait) Middle Eastern exports partially recovered while U.S. Gulf exports retreated; restocking demand had yet to be realized. On June 17, a memorandum of understanding was reached between the U.S. and Iran, temporarily restoring passage through the Strait of Hormuz and lifting some sanctions on Iran. Tanker traffic through the strait recovered to 50%, and exports from Yanbu remained high, with Middle Eastern crude oil exports regaining nearly 80%; at the same time, oil prices plummeted and U.S. Gulf exports rapidly fell back to pre-conflict levels. During this phase, it is estimated that global oil shipping volume decreased by 5% year-on-year, with freight rates initially surging but then continuing to decline. The central freight rate was lower than market expectations, possibly due to limited recovery windows: 1) The restocking demand had not yet materialized. High oil prices and weak end-demand resulted in lower-than-expected crude oil drawdowns, and prices did not form a reasonable contango structure, affecting commercial restocking pace. 2) The effects of the lifting of sanctions on Iran were also not reflected. Compliant shipowners were concerned about geopolitical fluctuations and retrospective sanction risks, and Iran continued to operate in a gray area. Third Stage (Mid-July 2026 to present, passage through both straits hindered) Oil transportation demand decreased again, and the freight rate remained at the one-year charter level. On July 12, Iran once again blocked the Strait of Hormuz, causing tanker traffic to drop quickly; on July 20, Houthi forces imposed a maritime blockade on Saudi Arabia, directly affecting Saudi crude oil exports from the Red Sea Yanbu port through the Bab-el-Mandeb Strait to Asia. In the past few weeks, some VLCCs have opted to navigate northward through the Suez Canal from the Red Sea and detour around the Cape of Good Hope to reach Asia. This detour will double the journey distance for Saudi crude to Asia, with transportation costs also doubling. During this round of geopolitical fluctuations, freight rates have increased but did not experience a significant spike like in March, which may be due to relatively limited regional supply-demand disorders; in the past month, there has been no significant increase in U.S. Gulf production, South American output remained stable, and Russian oil even slightly decreased. It is estimated that over the past two weeks, global oil shipping volume has decreased by more than 10% year-on-year; oil transportation demand has shrunk again, but shipowners remain resolute in supporting prices due to tightening mid-term supply-demand dynamics, with main VLCC routes' TCE still close to the high of $120,000 per year. The recurring geopolitical issues do not alter the long-term logic of oil transportation, maintaining the 'overweight' rating on oil shipping. 1) Restoration of the strait is still a mid-term trend. The firm expects that the restoration of passage can be anticipated in the next six months. If the strait is restored, oil transportation capacity utilization will return to pre-conflict highs, bolstering further replenishment. High profits over the next two years are assured; COSCO Shipping Energy Transportation A and China Merchants Energy Shipping have dividend yields of 4-5%, and COSCO Shipping Energy Transportation H has nearly 8%, which provides support for valuation limits. 2) Attention to unexpected demand from the lifting of sanctions on Iran. If the U.S. lifts sanctions on Iran, it is estimated to increase compliant demand by about 5%, with an even higher increase for VLCC compliant demand, which is not of a pulsed nature. In the coming years, the effective capacity of compliant oil tanker markets will remain rigid, and unexpected demand is likely to create a highly prosperous and sustainable compliant shipping market. Key recommendations include COSCO Shipping Energy Transportation, China Merchants Energy Shipping, Nanjing Tanker Corporation, and CSSC SHIPPING. Risk Warning Geopolitical situations and strait blockages, economic fluctuations and end-demand, safety incidents.