Zhongtong Finance and Economics APP learned that gtja released a research report stating that the recent drop in oil prices, besides economic concerns, may be more due to the restoration of Libyan crude oil supply and the possibility of OPEC+ increasing production. Considering the resilience of traditional energy, if the increase in crude oil production is effectively implemented, the decline in oil prices is expected to further drive the continued growth of oil transportation demand, even exceeding expectations. In the past two years, the restructuring of trade and the eastward shift of refineries have driven a significant increase in oil transportation demand, and the rigidity of oil tanker supply is gradually becoming evident. The utilization rate of oil transportation market capacity has reached a threshold in the first half of 2024. There may be a misunderstanding in the market about the impact of falling oil prices on oil transportation, and a reverse layout is recommended.

GTJA's main opinions include:

Short-term market: Trade rhythm dominates spot freight rates, with the industry generally expecting a peak season to continue

In the first half of 2024, the off-season in the oil transportation market is not weak, but over the past three months, spot freight rates have significantly declined, triggering market concerns. gtja believes that this may be mainly due to weak off-season demand and ongoing geopolitical oil price suppression on trade. VLCCTCE rebounded significantly in late August, which should be attributed to shipowners actively raising prices by concentrating cargo release. The trade rhythm dominates the volatility of spot freight rates, while actual operating period leases for oil tankers in 2024 Q3 will be higher than the market freight rate index average. The oil transportation market will enter the traditional peak season from October, with expectations from various factors such as increased winter demand, refinery quota utilization, and a stronger willingness of shipowners to raise prices, the industry generally expects that peak season freight rates in 2024 will continue to rise. Hinting at the difficulty in judging peak season freight rates, which is also not a core investment logic.

Medium-term trend: The level of oil tanker period charters is stable with an upward trend, reflecting industrial expectations of an upward economic outlook

Recently, spot freight rates for oil transportation have significantly dropped, while the level of period charters remains stable with an upward trend. The TCE of spot market in the Middle East-China route of VLCC has dropped from 0.05 million USD to a high of 0.02 million USD, while the one-year period charter for VLCC is still maintained at nearly 0.05 million USD/day. The three-year period charter has risen by 4,000 USD/day from the beginning of the year, and the five-year period charter has increased by 1,000 USD/day from the beginning of the year. While the level of period charters is stable with an upward trend, oil tanker shipowners generally release expiring period charter capacity to operate in the spot market, expanding operational exposure to increase future profit flexibility. Gtja believes that the increase in period charter levels and shipowners' operating strategies fully reflect the industry's general expectation that the prosperity of the oil transportation industry will continue to rise in the coming years. On one hand, the rigidity of oil tanker supply is evident; on the other hand, the industry expects that the demand for oil transportation will continue to grow.

If an increase in crude oil production drives oil prices to fall, it will be bullish for oil shipping.

Is a drop in oil prices bullish or bearish for oil shipping? The core lies in the reason for the drop in oil prices. If the drop is caused by a decrease in crude oil demand, the impact on crude oil consumption and shipping volume will depend on whether the drop in oil prices can offset the movement of the demand curve. If the drop is caused by an increase in crude oil production while crude oil demand remains relatively stable, it will likely stimulate growth in crude oil consumption and shipping volume, thus being bullish for oil shipping. In other words, the drop in oil prices actually ensures that the planned increase in crude oil production can be realized as an actual increase in crude oil sales volume.

In the past two years, the oil shipping industry has experienced an upturn, but has been affected by multiple production cuts by OPEC+ since October 2022, and the rise in oil prices has suppressed demand for oil shipping. In recent days, the drop in oil prices, apart from economic concerns, may be more due to the recovery of crude oil supply in Libya and the possibility of OPEC+ increasing production. Considering the resilience of traditional energy sources, if the increase in crude oil production is effectively implemented, the drop in oil prices is expected to drive continued growth in oil shipping demand, even exceeding expectations.

Investment recommendation: In the past two years, the reconstruction of trade and the relocation of refineries to the east have driven a significant increase in demand for oil shipping, and the rigid supply of oil tankers has gradually become prominent. It is expected that the supply and demand will continue to improve in the coming years, and the upturn in the oil shipping industry will surpass expectations. Therefore, it is recommended to pay strategic attention to the potential super bull market for oil shipping. The market may misunderstand the impact logic of a drop in oil prices on oil shipping, so it is suggested to take a contrarian approach. Maintain a "shareholding" position in China Merchants Energy Shipping (601975.SH), COSCO Shipping Energy Transportation (600026.SH), China Merchants Energy Shipping (601872.SH), CSSC Shipping (03877).

Upside risks: Economic fluctuations, geopolitical tensions, oil price risks, safety accidents, etc.