Hormuz Crisis Panic Fades; Tanker Freight Rates Retreat from Peaks but Remain Highly Profitable

Overview

This report is J.P. Morgan’s Week 9 update on China tanker shipping amid ongoing monitoring of Strait of Hormuz disruptions. The core conclusion is that as geopolitical panic subsides, tanker freight rates have normalized downward from extreme highs, yet overall profitability remains robust (roughly double YoY). Fleet utilization is improving as vessels return to active trading, and the market is transitioning from disruption-driven chaotic pricing toward a more demand-sensitive equilibrium. Nevertheless, physical supply bottlenecks and tight inventories preserve significant 'convexity' (i.e., asymmetric upside potential): should further supply constraints emerge or buyers shift from controlled purchasing to panic-driven restocking, rates could surge again.

Core views

Normalization of rates coexists with earnings resilience. Recent VLCC Time Charter Equivalent (TCE) earnings have retreated from March peaks (over $200k/day) to the current $90k–$120k/day range—approximately $90k–$100k/day on Atlantic routes and around $120k/day on Oman routes. The new pricing anchor, the TC34 index (Oman–China), has declined from WS220 (~$180k/day) to WS150 (~$120k/day). Despite this pullback, current levels remain roughly 100% higher than in 2025, indicating shipowners continue to enjoy high profitability. This suggests that pure supply disruption alone can no longer sustain peak pricing, and the market is digesting the earlier panic premium. Fleet utilization improves as waiting times shorten. Data shows a notable decline in VLCC idle and floating storage ratios. For example, COSCO Shipping Energy (CSET) saw its waiting ratio drop from ~31% to 17%, while China Merchants Energy Shipping (CMES) declined from ~30% to 21%. Most operators now report waiting ratios between 16% and 36%. Vessels returning to active trade reflect easing route uncertainty. However, improved utilization has not translated into stronger earnings—instead, falling rates suggest that marginal demand weakness and uneven cargo availability are offsetting the benefits of released capacity. Geographic restructuring of trade flows. Due to physical constraints at the Strait of Hormuz, the number of VLCCs heading to Saudi Arabia dropped from 48 in late March to 31 by early May, signaling slower Chinese crude import pacing from Saudi sources. Meanwhile, VLCC volumes to non-Hormuz Middle Eastern destinations (e.g., Oman and Saudi Red Sea ports) remained steady at around 40 vessels. This rebalancing has redirected more tonnage into Atlantic basin trades, intensifying competition and accelerating the normalization of rates on routes like TD15 (West Africa–China) and TD22 (US Gulf–China). Supply bottlenecks and latent upside optionality. Although OPEC+ announced quota increases, physical exports remain constrained by Hormuz limitations. Saudi quotas far exceed actual production, and UAE capacity cannot fully reach end markets. Alternative routes cannot fully compensate for lost Gulf volumes. The report argues current procurement is 'controlled' rather than 'panic-driven,' reflecting deferred—not destroyed—demand. If disruptions persist and inventories fall to critical levels, buyers may be forced into panic restocking, triggering a sharp rate rebound. Additionally, policy actions such as U.S.-led naval escort initiatives could provide further upside optionality.

Analysis framework

The report combines high-frequency data tracking with micro-structural supply-demand analysis. First, it quantifies rate movements by tracking specific shipping indices (e.g., TC34, TD15, TD22) and notes that with traditional Persian Gulf benchmarks invalidated, TC34 has become a more accurate proxy for VLCC earnings. Second, it uses fleet deployment data (e.g., waiting ratios and floating storage levels of major owners) to assess changes in effective supply, distinguishing between 'nominal capacity' and 'actually available tonnage.' Finally, it integrates cargo flow data (e.g., vessel counts to specific ports) with macro context (OPEC+ quotas, geopolitical constraints) to infer the market’s transition from 'disruption-driven' to 'demand-driven' dynamics, thereby evaluating its asymmetric risk-reward profile (limited downside, explosive upside potential).

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Tanker freight rates are fundamentally driven by the match between effective supply and immediate demand

  The report explains the initial rate surge through the mismatch caused by Hormuz-related physical supply bottlenecks (reducing effective supply) and panic buying (spiking immediate demand). It then uses declining waiting times and trade flow restructuring to demonstrate rebalancing, explaining the subsequent rate correction.

• Event Arbitrage & Behavioral FinanceExpectation Gap / Expectation Management

  Market pricing shifting from 'panic expectations' back to 'fundamental reality'

  The report notes that initial rate spikes included substantial 'panic premiums.' As the situation stabilized and vessels adapted to new routing, market expectations corrected and premiums evaporated. This shift from emotional extremes to rational equilibrium is key to understanding short-term price volatility.

• Valuation Methodology

  Application of Convexity Analysis in Cyclical Stocks

  The term 'convexity' describes the tanker sector’s risk-return profile: limited downside (as earnings are already high and costs are sticky) but massive upside potential (if further disruptions or restocking occur). This represents an asymmetric investment opportunity assessment approach.

Asset mapping & comparison

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

• COSCO Shipping Energy (1138.HK / 600026.SH)

  Beneficiary. As one of China’s largest tanker owners, it directly benefits from high VLCC rates.

  Strengths

  Waiting ratio rapidly declined to 17%, demonstrating strong operational agility in redeploying capacity to capture earnings.

  Comparison

  Compared to peers, COSCO Shipping Energy achieved a larger reduction in waiting ratio, indicating superior fleet deployment flexibility.

  Risks

  If geopolitical tensions ease rapidly, rates could fall further toward medium-term averages.

• China Merchants Energy Shipping (601872.SH)

  Beneficiary. Owns a large VLCC fleet and similarly benefits from elevated rates.

  Strengths

  Waiting ratio reduced to 21%, among the faster normalization speeds in the peer group.

  Risks

  Same as above—exposed to cyclical rate declines.

Key data

• VLCC TCE (Time Charter Equivalent)$90k–$120k/dayDown from peaks above $200k, but still +100% YoY
• TC34 Index (Oman–China)WS150Down from WS220, equivalent to ~$120k/day
• CSET Fleet Waiting Ratio~17%Previously ~31%, showing significant utilization improvement
• CMES Fleet Waiting Ratio~21%Previously ~30%, normalizing relatively quickly
• Number of VLCCs Heading to Saudi Arabia31 vesselsAs of May 3, down sharply from 48 on March 22

Impact & implications

For tanker companies, the recent freight rate pullback does not signal a collapse in profitability, but rather a return from extraordinary highs to still highly profitable normal levels. The report emphasizes that structural changes—diversified trade flows and improved utilization—have enhanced industry resilience. For investors, current share prices may already reflect some rate normalization, but likely underprice latent 'black swan' upside risks (e.g., full Hormuz closure or mass restocking). Thus, until geopolitical uncertainty fully dissipates, the tanker sector retains strategic allocation value, especially for leading companies capable of capturing high-rate windows effectively.

Risks

• Rapid geopolitical de-escalation leading to full restoration of Hormuz transit, causing freight rates to quickly revert to low levels.
• Global crude demand falling short of expectations, reducing cargo volumes and pressuring rates.
• OPEC+ actual exports rising significantly beyond market expectations, alleviating supply tightness.

What to watch

• Actual transit conditions at the Strait of Hormuz and implementation of any naval escort policies.
• Inventory levels and procurement strategies of major oil importers (e.g., China, India)—watch for a shift from 'controlled' to 'panic-driven restocking'.
• Whether actual crude exports from OPEC+, especially Saudi Arabia and the UAE, can overcome physical bottlenecks.
• Stabilization signals in VLCC rate indices, particularly TC34 and Atlantic routes.