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Top Five Short Term Factors Affecting The Oil Tanker Market

Intertanko North American Panel Meeting Tanker Market Review: Intertanko Member’s Top 10 “The Short & Long Of It” Poten & Partners, Inc. March 22, 2004. Top Five Short Term Factors Affecting The Oil Tanker Market. OPEC Iraq Venezuela Bosphorus/Turkish Straits US Gasoline Supply.

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Top Five Short Term Factors Affecting The Oil Tanker Market

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  1. Intertanko North American Panel Meeting Tanker Market Review:Intertanko Member’s Top 10“The Short & Long Of It”Poten & Partners, Inc.March 22, 2004

  2. Top Five Short Term Factors AffectingThe Oil Tanker Market • OPEC • Iraq • Venezuela • Bosphorus/Turkish Straits • US Gasoline Supply

  3. Top Five Long-Term Factors Affectingthe Oil Tanker Market • China • Libya • Single-hull phase out • LNG • Industry Consolidation

  4. 1. OPEC Production • OPEC production and tanker rates are closely tied

  5. OPEC Production • Expect seasonal reductions in production consistent with historical averages • The notion of inventory re-build is misleading. • Oil companies are now comfortable with low inventories • Forward price curve suggests risks are too high to rebuild • The good news – no slack in the system

  6. 2. Iraq: Post-war Output is on the Rise • Expect Iraq’s Oil production to continue to increase • Khor al-Amaya, Iraq’s newly repaired port will increase output to about 1.0 million bpd • Expect 1.5 million per day to continue from al-Bashrah • Ceyhan pipeline exports have resumes • First VLCC loaded at Khor al-Amaya after 13 years • SOMO expects total production to be around 2.8 million bpd by end April

  7. 3. Venezuela • Currently producing an average of about 2.5 million barrels per day • The United States imports about 1.5 million/day of this total • Reduced crude exports increase demand for long-haul crude • Gasoline prices are likely to increase if supply is reduced

  8. Caribs to US Daily Earnings • Spot market activity has fallen as contract coverage has increased.

  9. 4. Bosphorus Bottleneck • Weather and daylight related delays of 20 to 25 day in the Bosphorus are quite helpful for reducing tanker supply and hence increasing rates • The straights are probably close to crude export capacity, but the Black Sea will continue to be a main conduit for Russian crude • 89 million tons in 2003 vs. 44 million in 2000 • This crude is finding new sales locations including the Far East • Pipeline projects such as the Baku-Tbilisi-Ceyhan (BTC) Pipeline will not provide relief next year – so expect more delays next winter

  10. 5. US Gasoline Supply • As US gasoline demand begins to increase clean tanker rates have followed

  11. Summary of the Top Five Short-term Factors • The overall crude oil and product supply market is precarious • Uncertainty generally works in favor of strong rates • Excess European gasoline will come to the states increasing transatlantic demand • With crude oil prices near $40.00/bbl, it is hard to complain about high freight rates • Expect some seasonal weakness in tanker rates, but the balance of the year looks promising

  12. Top Five Long-Term Factors Affectingthe Oil Tanker Market • China • Libya • Single-hull phase out • LNG • Industry Consolidation

  13. 1. China: The Waking Giant • China’s increasing oil demand is sending tanker rates – along with everything else - up

  14. China: Demand, Demand, Demand • Petroleum demand in China second only to Japan • Current internal production clearly not expected to meet demand growth • Should China reach US crude consumption levels, would raise demand by 25 billion barrels/year • Most analysts predict that the China “bubble” is not likely to burst until after 2008 Olympics

  15. China – A Factor in Shipbuilding • China is becoming a major player in shipbuilding industry • Orderbook has 113 ships through 2007: • VLCC 9 • Suezmax 1 • Aframax 25 • Panamax 41 • Handymax 37 • Goal is to have 30% of the market by 2015

  16. 2. Libya – An Up and Coming Contender • Large Proven Reserves – about 36 billion barrels • Most crude currently shipped to Italy and Spain • Libyan crude is primarily shipped on Aframaxes, but some suezmax activity to the east • We see the trade going to India in larger ships (Suezmaxes) once investment in Libya increases production • If actual production increases another 1.0 million by end of decade, the crude will likely flow east in larger quantities

  17. 3. Single-Hull Phase Outs • The EU and IMO regulations have had positive impact on rates in the Atlantic Basin tanker market • Still a significant number of ships to phase out by 2010 and with some exceptions 2015

  18. Single-Hull Replacements • The current orderbook is essentially full through 2006 • More orders will still be needed in order to meet the full phase out • Regulatory pressure has generally been favorable for overall rates

  19. 4. Global LNG Trade Route Development • The global LNG trade has seen considerable growth in the past 30 years. • In 1970 only 3 worldwide export locations countries serving 5 import countries • By 2000 the trade grew to 12 export countries and 11 import countries with a much more dynamic trading patterns including spot cargo movements • The current world fleet of about 155 LNG tankers is still quite small compared to conventional oil tankers

  20. 1970 Global LNG Trade Routes • Algeria dominates LNG trade world wide, Libya and Alaska are small players • Europe is the main market

  21. 2000 Global LNG Trade Routes • US comeback and associated growth in spot trades • Korea is second largest importer of LNG worldwide. The Middle East becomes key supplier, able to access both Pacific and Atlantic basins

  22. Transportation Cost: LNG vs. Crude Oil High transportation costs relative to crude have limited development of a liquid spot trade in LNG

  23. LNG Supply/Demand Summary • Steady growth • Outlook for growth through 2010 is more rapid than in past 10 years • The challenge will be to meet “uncovered” demand since large contract coverage expires at the end of this decade, particularly in Asia-Pacific

  24. 5. Industry Consolidation • Oil companies merged in the late 90’s at a rapid pace • Tanker owners have followed suit • Analysis suggests that consolidation and the formation of pools has had positive economic benefits for owners

  25. 1997 Tanker Fleet Profile • Top ten companies controlled about 19% of the Dwt of tanker fleet and 9% of the ships

  26. 2004 Tanker Fleet Profile • Top ten companies today own about 23% of the Dwt of tanker fleet and still about 9% of the ships • Tanker pools have consolidated certain markets

  27. The Good News • Equity market historically tracked physical freight market. Both are now at record levels

  28. Top Ten Summary • With numerous variables in the tanker transportation network, wild-cards are generally beneficial to owners • Short-term crude supply is likely to be reduced, but overall annual demand is expected to be higher thanks to demand growth in key areas such as China and the US • Even the bears are getting, if not bullish, at least less bearish

  29. Poten & Partners New York ● London ● Singapore Athens ● Houston

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