Cathay Pacific Haitong: Dividends support the lower valuation limit of oil transport stocks, geology does not change the medium- to long-term logic

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that the situation in the Middle East has changed in three stages in the past six months, demand for oil transportation has shrunk and the freight center has remained high. Dividends support the lower valuation limit, and the long-term logic of geography is repeated. Iran's lifting of the ban is expected to make the compliance market extremely prosperous and sustainable. Geology repeatedly did not change the medium- to long-term logic of oil transportation, and maintained the oil transportation holdings increase rating.

Cathay Pacific Haitong's main views are as follows:

Phase 1 (March-June 2026, Strait of Hormuz blockade)

Demand for oil transportation has shrunk, and regional turmoil has led to a rise in the central freight rate. The US-Israel conflict broke out at the end of February, and Iran immediately blocked the Strait of Hormuz. Tanker traffic in the strait has been reduced by more than 80%, and Saudi exports from Yanbu Port have surged by nearly four times, yet crude oil exports to the Middle East have been reduced by more than half. Meanwhile, exports to the Gulf of America and South America surged by more than 30%, and Rosneft benefited from the temporary relaxation of sanctions and increased production by nearly 20%. It is still difficult to make up for the Middle East gap. It is estimated that global crude oil shipping volume (tons) decreased by about 11% year on year, and demand for oil transportation (tons* nautical miles), which is difficult to change due to longer flight distances, has shrunk. War risk premiums, rush shipping, and disruptions in regional supply and demand led to a sharp rise in initial freight rates, then declined somewhat as the disorder eased. It is estimated that the Q2 performance corresponds to a VLCCTCE of US$12-140,000, and the profit of China Merchants Shipping tankers surged 2.6 times over the same period last year.

Phase 2 (Mid-June to early July 2026, temporary resumption of traffic in the strait)

Exports from the Middle East have partially recovered and exports from the US Gulf have declined, and demand for inventory replenishment has not yet been reflected. On June 17, the US and Iran reached a memorandum of understanding. The Strait of Hormuz resumed traffic for a short time and Iran briefly lifted the ban. Tanker traffic in the Straits recovered to 50%, and exports from Yanbu Port remained high, and Middle East crude oil exports recovered by nearly 80%; at the same time, oil prices plummeted, and exports from the US Gulf quickly fell back to before the Middle East conflict. At this stage, it is estimated that global crude oil shipping volume was reduced by 5% year on year. The initial surge in freight rates continued to decline. The freight center fell below market expectations, or due to a limited recovery window: 1) Inventory replenishment has not yet been reflected. Due to high oil prices and weak terminal demand, crude oil removal falls short of expectations, and oil prices have not formed a structure of rising water within a reasonable period of time, which affects the pace of commercial inventory replenishment. 2) The effects of Iran's lifting of the ban have also not been reflected. Compliance shipowners are concerned about repeated geopolitical and the risk of retroactive sanctions, and Iran continues its grey operating model.

Phase 3 (since mid-July 2026, access to the Double Straits has been blocked)

Demand for oil transportation has shrunk again, and the freight center is still maintaining a one-year rental level. On July 12, Iran blocked the Strait of Hormuz again, and tanker traffic fell rapidly again; on July 20, the Houthis blocked Saudi Arabia at sea, which directly affected the export of Saudi crude oil from Yanbu Port in the Red Sea to Asia via the Strait of Mande. Over the past few weeks, VLCC has chosen to sail north via the Suez Canal out of the Red Sea and bypass the Cape of Good Hope for shipping to Asia. The detour will double the flight distance of Saudi crude oil to Asia and double the cost of transportation. There has also been a recovery in repeated geographical fares in this round, but there is no sharp rise similar to the one in March. The bank believes it may be due to relatively limited regional supply and demand disturbances. There has been no significant increase in production in the Gulf of America in the past month, South America has remained stable, and Rosneft has even dropped slightly. The bank estimates that global crude oil shipping volume has dropped by more than 10% year on year in the past two weeks, and demand for oil transportation has shrunk again. However, shipowners are determined to raise prices based on tightening supply and demand in the medium term, and the TCE for the main VLCC routes is still close to the high level of 120,000 US dollars for one-year leases.

Geology has repeatedly failed to change the medium- to long-term logic of oil transportation and maintain the oil transportation holdings increase rating

1) Straits restoration is still a medium-term trend. The bank is expected to resume traffic in the next six months. If the strait recovers, the oil transportation capacity utilization rate will return to the high level before the conflict, and Changjin control and inventory replenishment will be further icing on the cake. High profits can be expected in the next two years. COSCO Haineng A and China Merchants Shipping have dividend rates of 4-5%, and COSCO Haineng H is close to 8%. High dividends support the lower valuation limit. 2) Focus on the “demand accident” of Iran's lifting of the ban. If the US lifts sanctions against Iran, it is estimated that compliance demand will increase by about 5%, and demand for VLCC compliance will increase even higher, and not on a pulse basis. The effective capacity of tankers in the compliance market will remain rigid in the next few years, and unexpected demand is expected to make the oil transportation compliance market extremely prosperous and sustainable. We focus on recommending COSCO Marine, China Merchants Shipping, China Southern Oil, and China Ship Leasing.

Risk Alerts

Geographic situation and strait blockade, economic fluctuations and terminal demand, security incidents.