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The drivers in the product tanker market

Petroleum products seaborne trade - Indices

80110140170200230260290

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003 P05 P07 P09

Miles

Tonnes

Tonne-milesSource: Fearnleys

Product tanker daily freight rates 1999-2006

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jul-9

9

Oct-99

Jan-0

0

Apr-00Ju

l-00

Oct-00

Jan-0

1

Apr-01Ju

l-01

Oct-01

Jan-0

2

Apr-02Ju

l-02

Oct-02

Jan-0

3

Apr-03Ju

l-03

Oct-03

Jan-0

4

Apr-04Ju

l-04

Oct-04

Jan-0

5

Apr-05Ju

l-05

Oct-05

Jan-0

6

$/day

Clean Caribs-USAC 38,000 dwtClean Cont-USAC 37,000 dwt

Erik RanheimManager Research and Project Section

INTERTANKO Phone: +47 22122675P.O. Box 5804 Majorstua Fax: +47 221226410308 Oslo, Norway Mobile: +47 92057248

Bogstadveien 27BE-mail: [email protected]

Driver in the product tanker market - - INTERTANKO of 18

The factors influencing the product tanker market are:

The world economy and oil demand Product imbalances Refinery developments Arbitrage trade – taking advantage of different product mix, seasonal variations and

temporary situations such as maintenance Changing product specifications/Reclassification of Annex II products Tanker supply

In its latest prognosis the International Monetary Fund (IMF) forecasts the world economy will grow by 4.9% this year and 4.7% in 2007. The increase in world oil demand varies greatly from year to year, to a great extent in line with the world economy. However, the high oil price appears to have at least some effect on oil demand. Some believe that the oil price will remain high over the next few years. The high oil price does not appear to have affected the world economy significantly so far, but it could be affecting oil consumption.

There are three main areas of concern that could have a marked impact on the energy market. Firstly, meeting the majority of your vital energy demand from areas with unpredictable political regimes makes you vulnerable. Secondly, there is a growing indication that the greenhouse-effect is real, including the warming of the oceans resulting in a large number of strong damaging hurricanes. Thirdly, a large import bill can strongly affect the production costs for many industries as well as a country's balance of trade.

There are several initiatives being taken around the world to limit oil consumption and import dependency. Brazil is using an increasing amount of ethanol, Sweden bio-fuels, Japan is investing in gas to liquid projects, in the U.S. there is a waiting list to buy hybrid cars, in other places gas is being used as fuel, and in Finland they are investing in new nuclear plants as an environmentally friendly option.

World oil demand - mbd

65.0

70.0

75.0

80.0

85.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

World oil demand has over the last 10 years or so varied between a 0.8% increase in 2002 to 3.8% in 2004 - an average of 1.8% since 1994. The biggest and most important growth areas for the tanker industry have been China and the U.S. The projection for 2005 is also 1.8%. Continued high oil prices may mean a lower growth in world oil demand.


Increase in world oil demand in USA, China and ROW*

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Rest world

USA

China

mbd

23% 95% 50% 36% 29% 17% 24%7%

The product imbalances in the world are expected to worsen because no new refineries are planned in the U.S. and the diesel deficit in Europe is expected to increase with more demand for diesel cars, and little change in European diesel production over the next few years. The tight refinery capacity also gives rise to temporary imbalances due to refinery maintenance or seasonal variations.

Product mix in main consumption areas

0%5%

10%15%20%25%30%35%40%45%50%

Gasoline Gas/Diesel Residual oil Others

USA

Pacific

Europe

World oil consumption and refinery capacity

30

40

50

60

70

80

90

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Oil consumptionRefinery capacity

mbd

Sources: BP review until 2004+1.8% increase oil consumption 2005-2009Increase refinery capacity, Petroleum Economist


However, as from 2008 the situation is set to change as there are many new refinery projects and some large ones may come on stream in India and Middle East as from 2008. This will to a great extent be export capacity. There are 26 product tankers above 80,000 dwt on order indicating that more long haul product trade is expected. However, some 80% of product tanker tonnage on order is between 40,000-80,000 dwt. If the U.S. should take more product tankers from the Persian Gulf, this would create a great demand for product tankers. For example, the transport of half-a-million barrels per day from the Persian Gulf to the U.S. Gulf would require some 60 product tankers, about the same amount as if the products were taken from the Jamnagar refinery in India.

US gasoline imports by 4 week averages - mbd

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

mbd

Source: US DOE(EIA)

U.S. gasoline imports were up by more that 12% until mid April in 2006 compared to the same period in 2005. The increase in imports in 2005 over the same period was some 7%. Imports in the week ending 21 April this year were as high as 1.338 mbd. Only during the three weeks 30 September to 14 October 2005 after the hurricanes Katrina and Rita has a higher level been recorded - 1.465 mbd. The U.S. was in the last week of April entering the period which usually sees the highest gasoline imports. The imports for the four-week period starting the last week in April have on average since 1996 been more than 13% higher than for the whole year. Gasoline import until mid August has historically been higher than the average for the year. U.S. gasoline stocks as of 21 April were, according to the U.S. Department of Energy / Energy Information Administration (DOE/EIA), some 5% lower than on the same date in 2005. However, this may mainly be due to the U.S. switching from methyl tertiary butyl ether (MTBE) reformulated gasoline (RFG) to ethanol RFG. Terminals have been reducing their inventories of finished RFG, which is most likely winter grade gasoline, in order to make room for reformulated blendstock for oxygenate blending (RBOB) with alcohol. As the anticipated phase-out of MTBE progresses, finished RFG inventories are expected to virtually disappear. When MTBE was blended into the gasoline at the refinery level and then shipped via pipeline, it was included in both finished and total gasoline inventories because it was already co-mingled with the gasoline. However, when ethanol is to be blended with RBOB, only the RBOB is included in total gasoline inventories, while the ethanol is included in the “other oils” category. This places the apparently low gasoline stocks in a different light

The U.S. has managed to increase capacity in current refineries virtually every year, except in 2005 when a half-a-million barrels per day were shut down due to damage from the hurricanes Katrina and Rita. With increased world refinery capacity, in particular as from 2008, the U.S. may import more products for example from the Middle East or India.


http://www.eia.doe.gov/

Today there is a multitude of new refinery projects being launched, and it is unclear which are plans awaiting final decisions and which are concrete projects.

Petroleum Intelligence Weekly reports that new expansions will turn India into a global refining hub as they exceed the projections for domestic demand growth. Some 1.6 million barrels per day (mbd) of new capacity is due to come on stream by 2010 at a cost of around USD 12 billion, putting out products that meet the tightening fuel specifications in the U.S. and Europe, which are among the potential export markets.

Saudi Aramco's domestic and global refining expansion will take its gross refining capacity from 3.9 mbd to 6 mbd by 2011.

In South Korea S-Oil’s board approved a USD 3.7 billion project to build a 0.480 mbd refinery, a project which includes two secondary units: a 75,000 b/d residue fluid catalytic cracker to process fuel oil into gasoline and a 75,000 b/d hydrocracker for processing fuel oil into diesel and kerosene.

The limited refinery capacity coming on stream before 2010 may in itself keep product prices high and limit the increase in oil consumption. However, tight refinery capacity and little slack in the product supply chain will in itself mean increased product trades as maintenances and seasonal variations will increase the need to import products.

European products oil imports

3.63.84.04.24.44.64.85.05.25.45.65.86.06.2

1988

19

89

1990

19

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

06

mbd

Whereas European crude oil imports have remained rather steady, product imports have increased from 4.5 mbd in 1999 to 6.3 mbd in January 2006. Europe takes products from a number of areas - mainly intra European trade. Some 17% (1.1 mbd) of the product imports in January were taken from the Former Soviet Union, about 9% from OPEC countries, and some 5% from the United States.

With declining North Sea production and slower growth in the FSU, Europe may in future take more oil from West Africa and the Middle East. With the lack of diesel production capacity and an increasing share of diesel cars, increased diesel imports could also be expected.

The arbitrage trade is virtually impossible to predict as it depends on a mix of refinery maintenance, seasonal variations, refiners and trades occasionally taking advantage of price differences, and temporary refinery shut downs.

Largest charterers


The following information is based on reported fixtures and does not include oil company controlled tonnage, contracts of affreightment and/or spot fixtures. We hear from one broker that only about half the fixtures are reported.

There were 1,487 panamax spot fixtures in 2005, of which 938 were dirty. The ten leading charterers of the 549 clean spot fixtures are shown below. Collectively, these charterers also accounted for 43% of all panamax clean spot fixtures in 2005.

298 of the 549 panamax fixtures, or 54%, were AG liftings, 51 of which were to northern Europe with most of the remainder to Japan and other Asian destinations. The next largest movement is 74 fixtures between the UKC and the U.S., again in response to growing U.S. imports. Some 70% of panamaxes on order are coated indicating that the past employment trade of fuel oil and other dirty cargoes may not be where future employment lies.

Panamax clean fixtures 2005- total 1487 - 10 largest 237

4339

22 21 20 19 19 18 18 18

0

5

1015

2025

3035

40

45

Vitol

Shell BP

Itoch

uTTMI

Glenco

re

Morga

n St.

Clearlak

eCSSA

Titan

No

Source. Poten & Partners

There were 1,087 clean spot fixtures in 2005 involving small product carriers. Below are the top ten charterers, with Shell taking the lead.

Clean small product tanker fixtures-total 108 -10 largest 451

8768 59 56

43 36 31 24 24 23

0102030405060708090

100

Shell BP

Vitol

Glenco

reCSSA

Luko

il

Sibneft AOT

Trafigur

a

Pollem

ri

No


These ships trade mostly intra-regional such as in the Mediterranean, which is the largest single source of employment.

Of the total of 3,028 spot fixtures involving handymaxes, 2,661 were clean. The top ten charterers of clean handymax fixtures accounted for 43% of all fixtures. The reported contracts do, however, only represent a part of the market, as many tankers are on contracts of affreightment, period contracts, in oil company fleets, or not reported. (Source: Poten & Partners)


The United States dominates handymax employment with 432 fixtures between the UKC and the U.S, and 414 fixtures between the Caribbean and the U.S. accounting for nearly a third of all fixtures. The next largest category is intra-Asia, which accounts for 641 or nearly one quarter of all fixtures.

Clean handymax fixtures - total 3028 - 10 largest 1158

238

153 149 141 116 10270 71 64 54

0

50

100

150

200

250

Shell BP

Citgo

Exxon

MVito

l

Chevro

n

Trafig

ura

Glenco

reCSSA

Itoch

u

No


Product Tanker Supply 10,000- 59,999 dwt

The product tanker supply for the next couple of years is more or less decided by deliveries and phase out. The situation varies according to the segment, but some 18 dwt is due for delivery mainly by 2009 and there is only just over 9 m dwt to be phased out by 2009 and only a total of 12 m dwt to be phased out by 2015.

The overall situation is not critical but for the tankers 40,000-59,999 dwt there is 3.1 m dwt to be phased out by 2009 and an orderbook of 14.2 m dwt to be delivered within this period. The total phase-out in this segment is 6 m. The total fleet in this segment is some 25 m dwt, and delivery of 4.2-4,5 m dwt over the next years will mean a yearly fleet increase of some 15%.

Smaller tankers will to some extent be replaced by larger ones and the 40,000-59,999 dwt tankers will move into markets currently dominated by smaller ones, but smaller older tankers will also probably to a great extent continue to operate in local trades.

Product tanker fleet development - 10,000-59,999 dwt

-3

-2

-1

0

1

2

3

4

5

6

7

8

00 01 02 03 04 05 06 07 08 09 10

Mill

ion

dwt

Phase-out

Deliveries

Demolition.

Net change

Total phase out 2010 w ill be betw een MARPOL phase out (1.8 m dw t) and EU phase out (6.2 m dw t), subject to administrations


Panamax tankers supplyPanamax tanker fleet development - 60,000-69,999 dwt

-2

-1

0

1

2

3

4

99 00 01 02 03 04 05 06 07 08 09 10

Mill

ion

dwt

Phase-out

Deliveries

Demolition

Net change

Total phase out 2010 w ill be betw een MARPOL phase out (0.5 m dw t) and EU phase out (2.7 m dw t), subject to administrations

The panamax segment 59,999 – 69,999 dwt is the smallest tanker segment. The fleet end 2005 was 19.5 m dwt and the current orderbook is some 10 m dwt. Deliveries in 2006 of 4.1 and the phase-out of 0.6 m dwt will mean a fleet increase of 17%. The fleet is projected to increase by 12% in 2007, and deliveries in 2008 will mean a fleet increase of only 4%. However, there is room for more orders in 2008 and onwards.

ConclusionDemand for product tankers has been increasing strongly over the last few years. Currently there are signs of weakening demand. The product tanker demand may, however, still continue to be strong due to tight refinery capacity, which may mean a great deal of arbitrage trade In the longer term, new export refineries coming on stream as from 2008 are far from the main consuming areas.

Petroleum products seaborne trade - Indices

80110140170200230260290

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003 P05 P07 P09

Miles

Tonnes

Tonne-milesSource: Fearnleys

The graphs assumes apossitive development in world economy and oil demand

There is a great deal of tension in the oil market and the oil price has, contrary to expectations, been increasing at the same time as oil stocks have also been increasing. Both the crude and oil product situation is tight and the situation in several major oil producing countries is fragile.


Product tanker freight rates

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Average clean ratesAverage dirty rates

USD/day

Source: Clarkson

The freight rates for product tankers have over time in general followed the same trend as the tanker market as a whole. The strong peaks in the tanker market in 2001 and 2003 -2006 have been unprecedented. The normal rates in the product tanker market have historically been USD 10,000-15,000 per day. The break-even rate of a MR tanker at USD 40 m, operation costs of USD 5,000 per day and a 6% required rate of return will be some USD 17,000 per day.

There are few time series for spot panamax freight rates. The time charter rates and activity should be a good indication of the situation in this market:

Panamax period contracts of 6 months and above

year

No of contracts Total dwt

Average period

Average rate USD/day

2000 18 1,179,766 1.0 15,8882001 17 1,157,647 1.9 23,0782002 23 1,700,500 2.0 14,6882003 11 776,759 1.5 17,2852004 11 819,893 1.6 18,9322005 8 619,959 2.0 26,4002006 5 360,181 2.2 27,667

The freight rates have been increasing, but few contract have been entered into, meaning that operators have earned more in the spot market than charterers believe the longer term freight level will be.

The demand side in the product tanker market has been strong, and there are several reasons to believe that it will continue to be positive. However, the orderbook appears overwhelming for the next couple of years. The product tanker market is a fragmented, open and free market with many owners (see Appendix II- largest owners) and the rates over time will be break-even.


Clean tanker values - m USD

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Dec

-92

Sep

-93

Jun-

94

Mar

-95

Dec

-95

Sep

-96

Jun-

97

Mar

-98

Dec

-98

Sep

-99

Jun-

00

Mar

-01

Dec

-01

Sep

-02

Jun-

03

Mar

-04

Dec

-04

Sep

-05

Jun-

06

New 40,000 dwt, Clean

40,000 dwt, 5 years old

40,000 dwt, 10 years old*

30,000 dwt until 2004*

The values in the tanker market have not fallen to the same extent as the freight rates. This is because the ship yard orderbooks are full, the freight market has still been very profitable for most of the year and there still appears to be a general positive sentiment in the market. A strong world economy, high demand for raw materials from China, increasing demand for LNG, and a boosting offshore market contribute to keeping ship yards busy, and stricter newbuilding requirements1, may contribute to maintaining high newbuilding prices in the short term, despite falling rates. New shipyard capacity in China, and S Korea, in combination with falling steel prices, and easing demand for newbuildings, will probably also mean falling newbuilding prices in the longer term.

The upsides for the product tanker market are:

Refineries are being built at long distances from the main consuming areas (South Korea, India, Middle East);

According to the U.S. Energy Information Administration, eliminating MTBE (methyl tertiary-butyl ether) in gasoline mid 2006 will mean a net loss of domestic gasoline production capacity and a tight ethanol market, making room for imports;

The Former Soviet Union (FSU) is concentrating on product export at the expense of crude oil

Year 2003 2004 2005 J-F-06Mbd export 2.05 2.19 2.38 2.46

Source of FSU product export data: IEA Chinese growth in demand for oil may outweigh refinery expansion and China may

import more products. China has a net export of gasoline and gas/oil/diesel, but imports heavy fuel oil

Year 2003 2004 2005 J-F-06mbd prod import 0.443 0.663 0.485 0.475

Source for Chine product import: IEA Port restrictions for large product tankers in favour of MRs Current low gasoline stocks Current high refinery maintenance

The downsides for the product tanker market are:

Strong increase in the fleet Reduced demand due to high oil prices U.S. refinery capacity coming back on stream. Compared to weekly data last year for a

similar period (the four weeks ending 15 April 2005), gasoline production for the most

1 The stricter newbulding requirements (Common Structural Rules) are said to increase costs by 2-5%


recent four-week period is down 457,000 barrels per day, while gasoline demand is up slightly compared to last year

The use of larger product tankers for long distances – According to McQuilling, of the 149 coated aframaxes in the trading fleet, 58% are currently trading clean. Terminal restriction will limit aframaxes in clean, but it could be combined with lightering. The large product tankers are mainly used for dirty trades.

‘


Appendix Fleet development

Phase-out: Phase-out according to MARPOL 13 GDeliveries: Tankers to be delivered as from 2006Net: Deliveries minus phase-out as from 2006

10-19,999 dwt: fleet 261 product + 232 chemical/oil tankers

MARPOL

Phase out: 126

Deliveries: 46

Net: -80

Scrap

2003 17 17 -16 2004 21 21 -15 2005 40 40 -7 2006 -15 17 2 2007 -25 23 -2 2008 -14 5 -9 2009 -5 1 -4 2010 -17 -17 17 2011 -9 -9 2012 -6 -6 2013 -6 -6 2014 -4 -4 2015 -25 -25

Total -126 46 -80



MARPOL phase out

Phase out: 97

Deliveries: 9

Net: -88

Scrap

2003 5 -32 2004 8 -17 2005 0 11 -8 2006 -3 4 1 2007 -6 2 -4 2008 -23 3 -20 2009 -13 -13 2010 -14 -14 50 2011 -5 -5 2012 -3 -3 2013 -8 -8 2014 -4 -4 2015 -18 -18 2

Total -97 9 -88 0



MARPOL

Phase-out: 132

Deliver: 99

Net: -33

Scrap: 80

2003 40 5 -35 2004 43 19 -24 2005 0 34 13 -21 2006 -20 33 13 2007 -24 40 16 2008 -11 18 7 2009 -8 7 -1 2010 -18 1 -17 49 2011 -2 -2 2012 -9 -9 8 2013 -8 -8 2 2014 -5 -5 2 2015 -27 -27 8

Total -132 99 -33 -80



MARPOL

Phase out 105

Deliveries 389

Net: 157

Scrap

2003 58 43 -15 2004 81 71 -10 2005 0 78 71 -7 2006 -14 91 77 2007 -25 89 64 2008 -32 94 62 2009 -12 29 17 2010 -21 1 -20 2 49 2011 -6 -6 2 2012 -5 -5 3 2013 -7 -7 2 2014 -6 -6 11 2015 -19 -19

Total -147 304 157 -32


40-59,999 dwt: fleet 167 product + 204 chem/oil tankers

MARPOL

Phase out 83

Deliveries: 149

Net: 66 Ssrap

2003 58 41 -17 2004 37 21 -16 2005 45 36 -9 2006 0 52 52 2007 -10 46 36 2008 -10 35 25 2009 -12 16 4 2010 -20 0 -20 2 41 2011 -7 -7 2 2012 -5 -5 3 2013 -3 -3 2 2014 -2 -2 11 2015 -14 -14

Total -83 149 66 0


Appendix II

Tanker ownership

The product tanker market is very fragmented. The fleet contains chemical/oil tankers.The largest owners of product tankers are:

Owners dwt NoMitsui Osk Lines Ltd 1,188,955 33OMI 1,056,707 26Odfjell (mainly in the chem. market) 995,131 26Novoship 895,909 26Torm 873,089 19China Shipping Group 855,157 25Overseas Shipholding Group 794,393 18Brostrom AB 779,875 24Petrobras 746,618 24BP 709,226 16Interorient Navigation 707,964 19Imc Holdings 586,032 13Moller Ap 570,608 17Sovcomflot 569,188 12D'amico Societa Di Navigazione 532,005 12Latvian Shipping 526,907 19Blystad Shipmanagement 505,255 14Others 420 owners 37,343,127 1,258Total 50,236,146 1,601

Source: LRFairplay database

Largest panamax (60,000-79,999 dwt) owners. The largest owner only has 4% of the fleet.

Owner Total Total OrdersOverseas Shipholding Group 904,353 13 0China Shipping Group 745,916 11 2India Govt 738,951 11 0Cosco 736,179 11 3Eletson 697,691 10 0Tsakos Shipping&Trading 600,956 9Chemikalien Seetransport 561,784 8 2Dioryx Maritime 543,458 8Pleiades Shipping Agents 494,821 8 2Jacob E 460,971 7 0Others 106 owners 13,329,131 193 125Grand Total 19,814,211 289 136

World oil market conditions, growth in U.S. demand, and ongoing implementation of domestic fuel quality requirements are expected to keep consumer prices for motor fuels and other petroleum products high in 2006. Higher crude oil costs together with higher margins (retail price minus crude oil cost and taxes per gallon) are also expected to contribute to increases at the pump. Higher gasoline margins are likely because: 1) gasoline consumption is expected to grow solidly following weak growth in 2005; 2) Tier 2 gasoline requirements mandate a further reduction in sulphur content this year; and 3) the phase-out of MTBE from the gasoline pool is likely to put significant pressure on ethanol and gasoline prices.


Higher diesel fuel margins are expected because of the additional cost of producing ultra-low-sulphur diesel fuel later this year.


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