REPORT BY MARITIME STRATEGIES INTERNATIONAL LIMITED (MSI), LONDON

Tanker and Aframax

The tanker freight market waned during the first half of 2005, in line with Maritime Strategies’ expectations, as seaborne oil trade growth slowed (to 2%), after vigorous growth in 2004 (+5%).

The deceleration was partly due to a cluster of shocks to Asian oil consumption from rises in regulated retail prices. In addition, a weak performance in key oil exporting regions also hampered medium tanker demand - 2005 was a year-to-forget for Western Europe (-3%) and the FSU (-3%).

But with supply:demand balances remaining exceedingly tight, the decline did not reverse the profitability of tanker operations. Average Aframax spot market earnings fell to a low of just over US$25,000/day in August, well below the peaks of recent years, but still a very strong rate.

As the market pondered the meaning of the summer slump, the softer tone was spectacularly reversed by the fierce hurricane season which battered the US in the autumn.

The ensuing disruption to US crude oil production and refinery capacity kick started the winter season and boosted the near-term outlook for both crude and product tankers. The outlook for the first half of 2006 is, as a result, positive for all crude tanker segments.

Normal patterns, lower rates
Once the impact of these dislocations clears and normal demand patterns re-emerge two major downside risks for crude tanker earnings will reassert themselves. First, cargo demand is bumping up against a short-term ceiling due to crude oil supply constraints. Spare capacity is almost entirely made up of heavy/sour crude in the Middle East, for which there is currently little or no demand from refiners.

Second, massive supply growth from the record orderbook will keep downward pressure on market balances. This is especially true in the Aframax sector. Supply growth in the segment will be maintained in excess of 9%/year for four consecutive years in this segment, (2004-2008), which is no mean feat for any shipping sector.

The slick of deliveries has been absorbed well enough during 2004 and 2005 by trade growth, congestion in the Bosporus and disruptions such as the afore-mentioned hurricanes, but time is running out.



It could be argued that the crude oil tanker market has been thriving for too long on the expectation that around the corner there will always be another extraordinary event, like Hurricanes Katrina and Rita, to dislocate trade, tie up tonnage, and exaggerate market tightness. But it can’t rely on acts of nature forever.

Moreover, there is little safety valve to be found in heightened scrapping of ageing ships, because there are so few around. In 1992, 57% of all tonnage was over 15 years old. By 2008 that figure will be more like 23%. Ageing tonnage will be increasingly rare and younger ships (of barely 20 years old) would need to be scrapped to restore balance.

In summary, the outlook is for a weakening Aframax freight market though 2006, unless (or perhaps until) the next market dislocation occurs. From 2007, the easing in market balances should reduce the impact of such disruption, as some slack builds up in the global oil transportation network.

US Oil Imports and Lightering
2005 has been an eventful year for US oil imports and lightering in the US Gulf. Operations were dramatically disrupted by the hurricanes which battered the US Gulf coast in the autumn. The physical impact on lightering ships was limited by pre-determined plans to deal with such an eventuality, but the disruption to US oil imports has proved longer lasting.



US crude oil imports were heading for another record in 2005 until the hurricanes intervened, knocking out swathes of oil production and refinery capacity.

The loss of crude oil production might have been expected to boost imports, but the loss of refining has proved decisive. There is only limited scope for refiners elsewhere on the east coast to step up runs, and with 0.8 million barrels of refinery capacity still out of action in December, the short-term boost has been and will continue to be to petroleum product imports, which tend to come from Latin America and Western Europe.

In contrast, both US crude oil production and imports had recovered to levels some half a million barrels/day below pre-hurricane levels in early December (at 5 million barrels/day and 10 million barrels/day, respectively).



Looking into to 2006, we expect crude oil import growth to average just 0.5%, following a 2% fall in 2005, while the pace of product import growth will be maintained (at 3%).

With normality returning to US oil production and refining operations over the course of 2006, Maritime Strategies expect the growth in US crude oil imports to resume, adding more than 30 Million tonnes over the next three years.

The sourcing of this oil will be dependent on political decisions in Venezuela, but, setting aside any ongoing antagonism between Caracas and Washington, we expect the majority to come from Atlantic sources.

The trend in import sourcing is highlighted in the accompanying chart. This will to some extent limit growth in lightering volumes, but there are some positives, notably the opening of the Baku to Ceyhan pipeline (BTC) which will allow exports of Azeri oil to the US in VLCCs.