Tanker Market Highlights 2011 Q1

The overall story for 2010 can really be divided into halves. That is, the tanker market experienced a mini-boom in the first half of 2010, spurred on by the economic recovery and high levels of floating storage that softened the impact of a rapidly growing fleet. The dismal second half of 2010, however, was wrought by a surge in fleet availability due to a sharp decline in floating storage. Accordingly, while oil trade continued to increase, fleet utilization actually fell from 90% in the first half to just 88% in the second half. Looking back on last years performance, tanker earnings were up considerably from 2009, with an AG/East voyage on a VLCC garnering 34% more profit year-on-year. However, most of the gains were front-loaded. Earnings on the same route in the second half were 60% less than in the first half, as they fell from $54,000 per day to $22,000 per day. Likewise, Suezmax rates on the West Africa/U.S. route plunged from $36,000 per day in 10H1 to $19,000 per day in 10H2. Meanwhile, Aframax earnings for a Carib/U.S. voyage fell less dramatically, from $18,000 per day to $12,000 per day over the same time period. Though crude tanker owners saw slightly higher earnings in 10Q4, trade fundamentals suggested a softer market. This discrepancy, we believe, can partially be explained by falling fleet productivity, and in particular by increased slow-steaming and port delays, which are discussed at greater length below. Assets values also felt the pressure of weakening fundamentals in the fourth quarter, as we saw a 6% decline in second-hand values among the crude tankers. The product tanker market, on the other hand, seems to have experienced much less volatility than the crude tanker market in the second half of 2010. By historical measures, however, product rates are still very depressed. Increased refined products trade, partially due to stronger refinery margins, led spot rates on our benchmark Carib/U.S. clean route to average $11,000 per day in the first half of 2010 and $12,000 in the second half. But on most other routes, rates remained below $10,000 per day. Meanwhile, product tanker secondhand values slipped by 5% in 10Q4, as we estimate that the price of a 5 year-old vessel declined from $28.5 million in the third quarter to $27 million in the fourth. Marking a reversal of two consecutive quarters of contract price increases, newbuilding prices inched down in the fourth quarter of 2010 across the board, by an average of 1% compared to the previous quarter. For our benchmark 305,000 dwt VLCC, we estimate that the newbuilding price fell from $97 million to $96 million. Looking more closely at trade fundamentals, we see a mixed message. Though crude trade fell 3.3% in 10Q4, products trade grew 3.6%, compared to the previous quarter. Compared to 2009 levels, however, crude trade in 2010 is estimated to have grown by 3.4%, while products trade grew by 1.9% The tonne-mile demand associated with total oil trade shows a quarterly decline of nearly 2% in the fourth quarter. Although declining global oil imports was one of the key drivers, reduced long-haul crude trades to North America and China also played a role. For 2010 as a whole, however, tonne-mile demand was up by 5%, with crude growth running at a near 6% annual pace and products growth trailing at 2.6%. In addition to falling tonne-mile demand, floating storage also dipped in the fourth quarter. After peaking at 23 million dwt in November 2009, floating storage has been steadily declining, with falling products storage providing the bulk of the gravitational force. Floating storage fell from 12 million dwt in the third quarter of 2010 to 9 million dwt in the fourth quarter. The mixed message on trade fundamentals can also be seen on a regional level, where North American oil imports fell by 1.3 mbd to 9.9 mbd in the fourth quarteronly 2% higher from the same quarter of 2009as production soared and consumption was partially fed by 10Q3 stock builds. For 2010 as a whole, U.S. oil imports were down by 0.5%.

On the other hand, Chinas total oil imports in 10Q4 rose by nearly 2% over the previous quarter, as stronger product imports compensated for lower crude imports. Compared to 2009 levels, however, crude imports were up by nearly 20%, while product imports edged down slightly. European oil imports were also up in the fourth quarter of 2010, by an estimated 0.3 mbd, on the back of strong growth in Germany, higher refining margins, and severe winter conditions. Compared to 2009, imports are estimated to have been up only slightly. Asia/Pacific, another large driver of oil imports, registered relatively flat figures in 10Q4. Compared to the yearearlier level, however, we estimate that imports increased by 4%. Meanwhile, fourth-quarter estimates put OPEC crude production at 29.2 mbd, up 0.2 mbd from year-earlier levels and flat from the previous quarter. Overall, we estimate that tanker demand rose by nearly 1% in the fourth quarter of 2010, as tanker demand in oil trades rose, while demand in floating storage fell. Declining fleet productivity played a key role, due partly to a seasonally rise in delays through the Turkish straits and partly to a decrease in average fleet speed, as owners responded to the combination of weak freight rates and high bunker costs. Moving on to supply-side developments, we saw deliveries outpace scrapping in 10Q4, which resulted in a small increase in net additions to the fleet. The tanker fleet expanded by 4.3 million dwt, or approximately 1%, in the fourth quarter. Over the past year, the total fleet has grown by 4.5%, with the crude tanker fleet growing by 5% and the product tanker fleet growing by 4%. Initial estimates show tanker deliveries totaled 7.8 million dwt in the fourth quarter of 2010, down 24% from the previous quarter and down 13% from 09Q4. The lower deliveries in 10Q4 may be in part due to delays, as in a weak market some owners might prefer to assign the new year as the year of delivery, and indeed, deliveries picked up significantly in January. VLCCs accounted for 40% of the new tonnage entering the fleet in the fourth quarter, while product tankers accounted for 21%. After a large spike in the third quarter of 2010, tanker ordering fell back to below year-earlier levels in 10Q4. While VLCCs accounted for over 40% of ordering activity, only the Aframaxes saw an uptick in ordering compared to 10Q3. For 2010 as a whole, new orders more than doubled over 2009 levels.