JP Morgan: Middle East tensions drive freight rates to structurally high levels, reiterates "overweight" rating on COSCO Shipping Energy Transportation (01138)

JPMorgan Chase released a research report stating that they held an expert conference call to discuss how the Iran-related events are reshaping the oil tanker and natural gas transportation markets, with over 90 investors participating. They reiterated their "overweight" rating for the H-shares of COSCO Shipping Energy Transportation (01138), believing that the company will continue to maintain double-digit freight income, coupled with a tightening ship supply, which is expected to continue to support profit momentum. The bank gave it a target price of HK$24. The forward charter market indicates that even though spot freight rates are slowing down, oil tanker earnings over the next 12 months may still remain at structurally high levels; due to safety concerns, vessels scheduled to load in the Persian Gulf continue to avoid the area, leading to a tightening supply of effective oil tanker fleets; alternative crude oil transportation demand in long-haul shipping areas such as the U.S. Gulf of Mexico may significantly increase; and even if a ceasefire is immediate, the normal shipping flow through the Strait of Hormuz will take some time to recover as shipowners, insurers, and charterers need to rebuild confidence. The cost of a one-year very large crude carrier (VLCC) is currently at $110,000 to $140,000 per day. Assuming the transportation of 1 million barrels of oil equivalent petroleum products, the number of vessels required to transport from the U.S. Gulf of Mexico to Asia is more than four times that of the Persian Gulf. Market tension has also spread to other types of vessels, with daily rates for Aframax and Suezmax vessels on certain routes increasing to approximately $280,000 and over $450,000, respectively. Even if geopolitical tensions ease, normal shipping flow through the Strait of Hormuz could take several weeks to possibly two to three months to resume.