Expectations of Strait Reopening Reverse Pessimism; Tanker Stocks Remain Bullish

Overview

This report addresses market concerns about the tanker shipping sector and previews the second-quarter 2026 results of major companies. Morgan Stanley reaffirms its bullish stance, asserting that the reopening of the Hormuz Strait will spark a rebound in spot rates. Despite initial volatility, strong global crude oil restocking demand and capacity constraints in the Middle East will keep rates elevated for several months. The report highlights performance differences between China Merchants Energy Shipping (CMES) and COSCO SHIPPING Energy Transport (CSE), along with their respective drivers.

Core views

Core views center on supply-and-demand shifts following the Strait's reopening. On the demand side, importers are eager to rebuild inventories, while exporters need to release stored crude in the Gulf, leading to a surge in transport demand. On the supply side, some tankers have already shifted to Atlantic markets, creating potential capacity shortages in the Middle East; moreover, vessels currently stuck in the Gulf are mostly fully loaded, limiting immediate availability of spare capacity. Regarding earnings, the two companies show divergent trends. China Merchants Energy Shipping is projected to see Q2 2026 net profit grow by more than 50% quarter-over-quarter, reaching RMB 4.2 billion, driven primarily by a March surge in VLCC spot rates and strength in the dry bulk shipping market. In contrast, COSCO SHIPPING Energy Transport's total profit for Q2 2026 is expected to increase only marginally, around RMB 2.2 billion. This relatively subdued performance stems from factors such as ships stranded in the Arabian Gulf since March diluting effective rates, softening international refined product shipping due to Middle Eastern export shortages, and slower Chinese crude imports weighing on domestic petroleum margins. As for market sentiment, tanker stocks underperformed the broader market index by 17–27 percentage points over the past three weeks (May 21–June 11), largely reflecting disappointment over the prolonged Strait closure and fears that declining global oil reserves would reduce transport demand. With rising expectations of a Strait reopening, this pessimistic mood is now reversing.

Analysis framework

The firm employs an analytical framework combining event-driven analysis with supply-and-demand logic. First, it reviews recent stock price movements and deviations from market expectations to pinpoint the root cause of bearish sentiment—namely, misjudgments about the Strait's closure duration. Next, using supply-and-demand reasoning, it simulates scenarios post-reopening, examining both inventory rebuilding (demand-side increment) and regional capacity mismatches (supply-side constraints) to demonstrate the sustainability of rate increases. Finally, by dissecting each company's business structure—including VLCC share, route distribution, and vessel detention status—the firm quantitatively forecasts second-quarter results, validating investment rationale at the fundamental level.

Methodology notes

• Industry/sector analysis frameworkSupply-and-Demand Framework

  Predicting spot rate trends by analyzing crude oil transport demand (inventory rebuilding) and supply (Middle East capacity shortages).

  This is a standard analytical paradigm for cyclical industries: when demand surges unexpectedly while supply remains constrained due to geographic or political factors, prices often experience sharp fluctuations.

• Valuation methodPB valuation

  Using the price-to-book ratio (P/B) combined with probability weighting (25% bull market, 60% baseline, 15% bear market) for valuation.

  For highly cyclical shipping stocks, book value tends to be more stable than earnings, making it a reliable valuation anchor. Probability weighting accounts for uncertainties like geopolitical risks affecting valuations.

• Event博弈 and behavioral financeExpectation Gap/Expectation Management

  Focusing on investment opportunities arising from the gap between market expectations (pessimistic) and actual potential changes (Strait reopening).

  When the market broadly anticipates negative outcomes but conditions improve marginally, significant valuation recovery often follows.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Merchants Energy Shipping (601872.SS)

  Beneficiary, expected robust Q2 2026 earnings growth

  Strengths

  Benefits from VLCC spot market surge and dry bulk market strength

  Comparison

  Higher earnings elasticity compared to COSCO SHIPPING Energy Transport

  Risks

  Weaker global economy may dampen crude oil demand

• COSCO SHIPPING Energy Transport (1138.HK / 600026.SS)

  Beneficiary, though short-term performance constrained by multiple factors

  Strengths

  Long-term benefits from global crude oil storage rebuilding

  Weaknesses

  Vessel delays in the Arabian Gulf dilute rates; refined product shipping softens

  Comparison

  Relatively muted Q2 2026 performance

  Risks

  OPEC crude production below expectations; A-H premium compression

Key data

• China Merchants Energy Shipping Q2 2026 Expected Net ProfitRMB 4.2 billionGrowth of over 50% quarter-over-quarter
• COSCO SHIPPING Energy Transport Q2 2026 Expected Net ProfitRMB 2.2 billionSlight quarter-over-quarter increase
• Recent Relative Performance of Tanker StocksUnderperforming the broader market by 17–27 percentage pointsDuring May 21–June 11
• COSCO SHIPPING Energy Transport H-Share Target P/B (Baseline)2.5x2.7 standard deviations above historical average
• COSCO SHIPPING Energy Transport A-Share Target P/B (Baseline)2.5x2.7 standard deviations above historical average
• China Merchants Energy Shipping Target P/B (Baseline)3.2x2.7 standard deviations above historical average

Impact & implications

The report views the Strait's reopening as a key catalyst for the tanker shipping sector. For China Merchants Energy Shipping, the strong momentum in VLCC spot markets provides greater earnings elasticity. Meanwhile, although COSCO SHIPPING Energy Transport faces short-term headwinds from vessel delays and weak refined product shipping, long-term prospects remain supported by global crude oil storage rebuilding and potential easing of Iranian sanctions. Investors should focus on equilibrium price levels after initial volatility rather than fixating solely on short-term news swings.

Risks

• Failure of the Strait's reopening
• Weaker global economy reducing crude oil demand
• Lower-than-expected OPEC crude output
• Return of shadow fleets

What to watch

• Progress of global crude oil storage rebuilding
• Whether Iranian oil sanctions are lifted
• Spot rate volatility post-Strait reopening and eventual equilibrium levels