CITIC SEC: Watch for Another Upswing in Freight Rates; Pullbacks Present Buying Opportunities

CITIC SEC released a research report stating that the short-term pace of cargo release combined with rising ship attack activity has disturbed freight rates. In October 2026, the number of ships attacked in the Middle East exceeded that of September. VLCC one-year time charter rates remain stable, but last week's spot rate pullback triggered market concerns. The bank believes that the spiral rise in effective capacity demand and the increase in Middle East shipments continue to squeeze the transportation side. With the subsequent concentrated release of peak-season cargo, VLCC freight rates are expected to usher in another upswing. After non-compliant vessels are converted into compliant vessels, they still face multiple thresholds such as classification society certification and insurance acquisition. Coupled with the generally older vessel age, the impact on effective capacity is expected to be less than 20 vessels. This round of freight rate increases stems from strong upstream export demand and downstream continuous inventory depletion driving security-of-supply demand, which continues to squeeze crude oil transportation. Against the backdrop of persistently tense geopolitics, the tightness of oil shipping supply and demand is expected to be difficult to ease. At the same time, the continuous depletion of downstream inventories accumulates restocking demand, and tighter refined product supply is expected to keep cracking spreads at high levels. It is recommended to watch for layout opportunities brought about by news-driven overselling. CITIC SEC's main views are as follows: The short-term pace of cargo release combined with rising ship attack activity has disturbed freight rates. VLCC one-year time charter rates remain at highs. With the subsequent re-concentrated release of cargo, VLCC freight rates are expected to usher in a second upswing. According to Clarksons, for the week ending October 26, 2026, VLCC/Suezmax/Aframax freight rates changed by -26%/-11%/+5% week-on-week to US$530,804/651,919/352,008 per day, respectively. Recently, the frequency of ship attacks in the Strait of Hormuz has increased, combined with a slowdown in the pace of cargo release, and VLCC freight rates have pulled back. According to Clarksons data, as of October 21, 2026, the number of ships attacked in the Middle East in October 2026 was 32, already exceeding September. However, VLCC one-year time charter rates have remained relatively stable overall. For the week of October 26, 2026, the VLCC one-year time charter rate was US$275,000 per day, down only 2% week-on-week, indicating that actual VLCC supply and demand remain tight. Recently, VLCC freight rates have begun to stabilize and recover. On October 23, 2026, the TD3C freight rate rose 0.5% from the previous day. With the subsequent concentrated release of peak-season cargo, freight rates are expected to usher in another upswing. The conversion of non-compliant vessels still faces multiple thresholds, and coupled with generally older vessel ages, the operating scope suitable for the compliant market is expected to be extremely limited, with a relatively small actual impact on capacity. Pulse-like incremental upstream export demand and the spiral rise in effective capacity losses on the supply side continue to transmit to freight rates. In mid-October, according to Reuters, the Trump administration was studying relaxing restrictions on some "shadow fleet" tankers. Meanwhile, on the 20th, the U.S. Department of Energy said the Trump administration was authorizing the sale of some sanctioned tankers, planning to convert them through refurbishment and approval procedures to legal operations transporting unsanctioned crude oil. However, the bank believes that even if non-compliant vessels have their sanctions lifted, returning to the compliant market to operate on mainstream routes still faces multiple thresholds, requiring re-certification by classification societies, obtaining insurance, meeting emission standards, etc. The impact on effective capacity is expected to be less than 20 vessels. At the same time, most insurers are from Europe. In early October, the EU reached a principle consensus on the 22nd round of sanctions against Russia. After adoption, it is expected to further increase the difficulty for these vessels to obtain insurance. Therefore, the bank believes there is no need to worry too much about the conversion of non-compliant vessels; this measure is still another extreme move by Trump before the midterm elections. This round of freight rate increases stems from strong upstream export demand and downstream continuous inventory depletion driving security-of-supply demand, which continues to squeeze crude oil transportation. STS operations cause a spiral rise in effective capacity losses that continues to transmit to freight rates. High cracking spreads provide a marginal DRIVE for spot demand. Energy supply chain stability remains a priority condition. The continuously widening inventory gap is expected to lay the foundation for potential restocking demand after summer 2027. The continuous decline in downstream inventories increases security-of-supply demand. According to IEA data, as of end-September 2026, global observable crude oil inventories fell by 510 million barrels, with onshore inventories at the lowest since 2016. Along with the release of U.S. SPR and IEA strategic reserve crude, medium- to long-term restocking demand continues to accumulate. In addition to crude oil, refined product inventories are also falling rapidly. According to IEA data, OECD middle distillate inventories in July were 570 million barrels, 5% lower than before the war and the lowest since November 2023. Meanwhile, Middle East refined product exports were only 1.9 million barrels per day, 40.4% of the pre-war 4.7 million barrels per day. Tight refined product supply is expected to keep cracking spreads at high levels. Against the backdrop of frequent geopolitical conflicts, energy supply chain stability is a priority condition for security-of-supply demand, and a higher risk premium can be accepted. The bank expects the fourth-quarter freight rate center to rise significantly, and the current pullback is a layout opportunity. The current stock price does not fully reflect fourth-quarter freight rate expectations. Risk factors: Refinery utilization below expectations, geopolitical conflicts having a greater-than-expected impact, cracking spreads falling rapidly, etc. Investment strategy The short-term pace of cargo release combined with rising ship attack activity has disturbed freight rates, but VLCC one-year time charter rates remain stable at around US$280,000 per day. With the subsequent concentrated release of peak-season cargo, VLCC freight rates are expected to usher in another upswing. The bank believes there is no need to worry excessively about the conversion of non-compliant vessels. After sanctions are lifted, these vessels still face multiple thresholds, and coupled with generally older vessel ages, the actual operating area for these vessels is expected to be very limited, with the impact on effective capacity being less than 20 vessels. This round of freight rate increases stems from strong upstream export demand and downstream continuous inventory depletion driving security-of-supply demand, which continues to squeeze crude oil transportation. Against the backdrop of persistently tense geopolitics, the tightness of oil shipping supply and demand is expected to be difficult to ease. At the same time, the continuous depletion of downstream inventories accumulates restocking demand, and tighter refined product supply is expected to keep cracking spreads at high levels. The pullback is a layout opportunity.