CITIC SEC: Capacity loss spirals upward, 1YR charter rate nears 200,000

CITIC SEC released a research report stating that the market is focused on the sustainability of freight rates and whether peak-season rates will rise further. The spiral of effective capacity loss and the resonance of cargo volume release squeezing the transportation side mean short-term freight rates still have further upside resilience, and current freight rates have not yet fully reflected the tightness of supply-demand relationships. Dark fleet sailing, rerouting, and Gulf STS operations continue to consume effective capacity. The freight rate surge is clearly spreading from routes to vessel types. Against the backdrop of a shortage of available ships, million-dollar TCE has emerged, and cracking spreads for some products exceeding $100/barrel reinforce the impulse of commodity traders and Gulf oil-producing countries to scramble for cargo. Cargo volumes in October-November after the holiday are expected to be better than September, peak-season freight performance is expected to exceed expectations, and the reshaping of the tanker cycle paradigm continues to be recommended. CITIC SEC's main points are as follows: Tanker freight rates across different vessel types and shipping routes have hit historic highs, with 1YR eco-friendly VLCC charter rates approaching $200,000/day. The market is focused on the sustainability of freight rates and whether peak-season rates will rise further. The bank believes it is necessary to return to the core contradiction in tanker freight rates since August 21 the spiral of effective capacity loss and the resonance of cargo volume release squeezing the transportation side. Short-term freight rates still have further upside resilience, and current freight rates have not yet fully reflected the tightness of supply-demand relationships. According to Clarksons data, in the week of September 18, one-year time charter rates for eco-friendly VLCCs rose to $175,000/day. In the week of September 18, 2026, average TCE for VLCCs and Aframaxes increased 42.3% and 18.5% quarter-on-quarter to historic highs of $631,000/day and $177,000/day, respectively, with intra-Gulf VLCC TCE exceeding $1 million/day. The market is focused on the sustainability of freight rates and whether peak-season rates will rise further. The bank believes it is necessary to return to the core contradiction in tanker freight rates since August 21 the spiral of effective capacity loss and the resonance of cargo volume release squeezing the transportation side. Short-term freight rates still have further upside resilience, and current freight rates have not yet fully reflected the tightness of supply-demand relationships. The bank's report "Tanker Cycle Weekly Annual Profit Historic High Seen from 1Q26 Earnings Forecast" (2026-04-06) first proposed the judgment that the asset attributes of tanker fleets are gradually shifting from "low-return strong cyclical" to "rigid-demand strategic assets," and the traditional shipping cycle supply-demand analysis paradigm needs to be adapted and optimized accordingly. In 4Q26, tanker leaders' valuations and profits are expected to hit historic highs, and the bank continues to strongly recommend the sector. The spiral of effective capacity loss has become a marginal variable that must be taken seriously. Over 85% of cargo from the Middle East region is transshipped through various forms. Congestion effects at Fujairah and Egypt's Ain Sukhna terminals are becoming increasingly prominent, and shipyard maintenance is expected to become stricter going forward. The "no ships available" situation may be an important support for further short-term freight rate increases. The Strait of Hormuz has moved beyond the binary state of complete closure or complete openness. Against the backdrop of dual obstruction at the Strait of Hormuz and the Bab-el-Mandeb Strait, with ships and pipelines under continuous missile threats, the Greater Middle East region is expected to maintain shipments of 9-10 million barrels per day. However, since August 21, as time has passed, dark fleet sailing, STS operations near Fujairah, and rerouting have caused the spiral of effective capacity loss to escalate, with congestion times at Fujairah, Egypt's Ain Sukhna, and other terminals continuing to rise to over 10 days. Under a neutral assumption, waiting times at ports outside the Gulf have increased by 6-8 days compared to before August 21, while a Persian Gulf-Singapore round trip takes 28-32 days, roughly estimating effective capacity loss at 18.8%-28.6%. As imports from major Asian consuming countries such as Japan and China increase quarter-on-quarter, the tightness of the "no ships available" situation will persist. Meanwhile, ship congestion at Egyptian ports has led to a significant increase in capacity demand, with capacity that shifted to the US Gulf in June-July returning to the Mediterranean or Middle East. In the week of September 18, BDTI TD22 (US Gulf-China) rose to $347,000/day, a 1.3x increase from the week of August 21. Against the backdrop of frequent geopolitical events, China Merchants Energy Shipping, with more flexible operating mechanisms and a superior fleet structure, is expected to benefit first. Unlike the "price up, volume down" situation in the Gulf region in 2Q26, this round's Gulf oil-producing countries' shipment demands and the import inflection point of major consuming countries may be the main changes on the demand side. The continuous expansion of cracking spreads reinforces the impulse of commodity traders and cargo owners to scramble for cargo. Gulf transshipment volumes in September are expected to increase further, and peak-season demand resilience can be expected. The bank believes that the model of "adopting an 'import-export parallel' strategy, using overseas export profits to subsidize refinery cash flow" is feasible. Since August, utilization rates at major Asian refineries have risen. Winter seasonal demand for refined products, the continued extension of Russia's refined product ban, and damage to major regional refineries mean that export demands from Gulf oil-producing countries such as Iraq are expected to resonate with crude oil consumption growth. According to CME and S&P Global data, this week US and European diesel prices were $212.4/barrel and $209.2/barrel respectively, and the latest Brent crude settlement price was $98.85/barrel. Without considering other costs, cracking spreads have widened to $113.6/barrel and $110.4/barrel, further increasing import demand from commodity traders and cargo owners. "Supply chain stability and security" has replaced "efficiency and cost priority" of the globalization era as the primary core element, and pricing power has clearly shifted to those who control capacity. The market still partly worries about the potential impact of future deliveries. On the contrary, the bank believes that over the next year and a half, the tanker market should focus more on the tightness brought by the "no ships available" situation. The importance of tanker fleets as "rigid-demand strategic assets" to upstream and downstream players in the industrial chain is becoming increasingly prominent. According to Clarksons data, as of 2030, the tanker market has a cumulative planned delivery of 306 VLCCs, but at the same time, VLCCs over 20 years old number 437. The bank expects that new ship deliveries in 2027 will not yet be able to meet effective capacity loss and old ship replacement needs. Recently, shipyard maintenance standards are expected to improve, while terminal ship acceptance standards and efficiency may see potential marginal changes. Effective capacity loss will further increase while old ship scrapping is expected to rise. According to Clarksons data, 10-year-old VLCC transaction prices have risen to $140 million, and 5-year-old VLCCs command a significant premium over new ships. Recently, Iraq National Oil Company, Abu Dhabi National Oil Company, and others have purchased VLCCs at high prices, indicating that the importance of tanker fleets as "rigid-demand strategic assets" to upstream and downstream players in the industrial chain is becoming increasingly prominent. Rising replacement costs continue to thicken the safety cushion for tanker leaders. Risk factors: Restocking demand below expectations, geopolitical conflicts impacting more than expected, recovery of Strait of Hormuz transit below expectations.