Shenwan Hongyuan: Tanker freight rates break through during the off-season, focus on the pre-peak season

According to the Zhitong Finance APP, Shenwan Hongyuan released a research report stating that freight rates continued to rise in August this year, exiting the off-season early, with a significant divergence from the same period in 2023 and 2024, indicating an earlier turning point. Recently, the reduction in supply from Iran, Russian oil, and Venezuela will increase future compliant crude oil demand. In addition, increased production in the Middle East is expected to gradually ramp up during the peak demand season, with crude oil demand (especially compliant crude oil) expected to further improve from September to December, supporting strong performance in freight rates during the fourth quarter peak season. The VLCC TD3C-TCE daily rate surged by 23%, with off-season freight rates breaking through USD 50,000 per day. U.S. stocks FRO, ECO, DHT, etc., have begun to rise following freight rates, and AH shares in oil transportation are expected to catch up. Due to the relatively low position, there is significant room for catch-up, recommending CMES (601872.SH).

Shenwan Hongyuan's main points are as follows:

Reasons for the recent rise in VLCC freight rates

On a macro level, Powell stated at the Jackson Hole annual meeting that although inflation remains a concern, rising risks in the job market may lead the Federal Reserve to cut interest rates in September. Against the backdrop of strengthening rate cut expectations, pro-cyclical demand expectations have improved, leading to increases in commodity and transportation prices. On a micro level, the price difference between WTI crude oil in the U.S. Gulf and Middle Eastern crude oil has widened, opening up an arbitrage window for West-East trade, increasing long-distance transportation, and tightening Middle Eastern capacity after the fleet heads west. In a tight capacity situation, the Middle East's cargo volume in September has remained steady, with supply-demand imbalance leading to a surge in freight rates. Suezmax tanker freight rates are operating strongly, reaching up to USD 60,000 per day, with some demand spilling over into the VLCC market.

Off-season turning point arrives early, focus on continued rise in peak season freight rates

Freight rates continued to rise in August this year, exiting the off-season early, with a significant divergence from the same period in 2023 and 2024, indicating an earlier turning point. Recently, the reduction in supply from Iran, Russian oil, and Venezuela will increase future compliant crude oil demand.

The escalation of sanctions on Iran has led to a decrease in exports, with crude oil exports dropping from the previous 1.7-1.9 million barrels per day to around 1.3-1.4 million barrels per day in the last four weeks; Russian crude oil exports have declined due to the escalation of sanctions from Europe and the U.S. (the crude oil export price cap has been lowered from USD 60 per barrel to USD 47.6 per barrel), with recent export volumes dropping from the previous 3.5 million barrels per day to around 3.1-3.2 million barrels per day; the U.S. has again authorized Chevron's operating license in Venezuela, with Venezuelan crude oil now directed to the U.S., leading to a significant decline in exports to the Far East, which have recently dropped to zero.

In addition, increased production in the Middle East is expected to gradually ramp up during the peak demand season, with crude oil demand (especially compliant crude oil) expected to further improve from September to December, supporting strong performance in freight rates during the fourth quarter peak season.

Stable demand from China, global active inventory replenishment phase

According to export data statistics, from January to July 2025, China's crude oil imports increased by 4.6% year-on-year, with imports excluding Iranian, Venezuelan, and Russian crude oil increasing by 5.3% year-on-year, with the increase mainly coming from West Africa, Brazil, and Canada. From January to July, China's crude oil imports averaged about 10.9 million barrels per day, with approximately 325,000 barrels per day flowing into inventory, accounting for about 3.0%. Therefore, China's apparent demand remains stable overall, while entering an active inventory replenishment phase, and there is still some room for the current storage capacity to reach historical highs In addition, from January to July, both Europe and the United States, as well as Japan and South Korea, have achieved cumulative inventory increases of approximately 150,000 barrels per day and 50,000 barrels per day, respectively.

The supply-demand gap in the VLCC market continues, with an upward trend in the economic cycle confirmed

The aging fleet has led to a decline in effective capacity, and the price center for 2025-2026 is expected to continue to rise. Based on effective capacity calculations, the growth rates for VLCC effective capacity from 2025 to 2027 are projected to be -4.1%, -0.3%, and +1.8%, respectively. Assuming 30 VLCCs are delivered each year from 2028 to 2030, the effective capacity growth rates would be -0.5%, -1.0%, and -1.2%, respectively. There is no need to worry about supply at least until 2030. On the demand side, increased production by oil-producing countries continues to drive the growth of trade volume, with demand growth rates expected to be 2.3%, 1.4%, and around 1% for 2025-2027 (based on the median forecasts from EIA, IEA, and OPEC for 2025-2026). Therefore, the supply-demand growth rate differences for VLCCs are projected to be -6.4%, -1.7%, and 0.8%, which overall remains favorable for the elevation of the price center.

U.S. stocks lead the way, with significant room for AH stock price adjustments

CMES is at 0.84 times, compared to 1.16 times for FRO in the U.S. stock market and 1.06 times for DHT. From the perspective of price elasticity, for every $10,000 per day increase in TCE for CMES's tanker fleet (52 VLCCs and 8 Aframaxes), it adds 1.53 billion before tax profit; for dry bulk, every $10,000 per day increase adds 1.51 billion before tax profit (16 Capesizes, 6 Panamaxes, and 37 Supramaxes and Handysize).

Risk Warning

Changes in geopolitical conflicts; tariff policies leading to global economic recession; Middle East production increases falling short of expectations, etc