Spot Market * Freight Swaps

Tanker Market
Drivers, Issues and Outlook For The
Major Tanker Sectors –
VLCC, Suez, Afra, Pmx & MR
October 2012
Jerry Lichtblau
True North Chartering
Jerry Lichtblau
[email protected]
Broad Theme
 Impact of evolving oil demand has been joined by changing logistics of
crude supply to negatively impact tanker demand.
 Increased tanker supply and shorter voyages from source to destination of
primary areas of demand growth have …
 Combined with increased crude production from historic centers of demand
that remain critical for tankers due to nominal volume of oil consumed to
weaken earnings
 Growth of crude supply has exceeded oil demand during 2012
 Aided tanker rates pre-summer 2012; impact of Iranian sanctions and softer
Chinese demand have helped thwart any kind of post-summer recovery –
are among primary issues to monitor going forward
 U.S. “new crude”, in particular, not necessarily crude of choice –
displacing some crudes while increasing demand for others
 Increased attention to crude specifications as historic trade patterns impacted
 Evolving demand/production has impacted product as well as crude
Supply Picture
 Past growth has been centered in Suez & Afra sectors
 This year growth will be significant and/or increase its pace for VL’s &
Suez, while moderating for Aframaxes
VL’s – 2012/’13 – 106 deliveries -- 62 in 2012 & 44 in 2013
Suez – 2012/’13 – 117 deliveries -- 63 in 2012 & 54 in 2013
Afra – 2012/’13 – 83 deliveries -- 54 in 2012 & 26 in 2013
Proj. approximately 25 scrapping/removals for both VL’s and Sz in 2012
Proj. approximately 45 scrapping/removals of Afra’s in 2012
 Thru September 7 VL’s, 19 Sz and 27 Afra’s have been scrapped
 Historically VL’s have large # of “other removals” – 20 in 2011 vs. 12 scrap
Supply Picture Con’t
 Growth for the Panamax sector anticipated to continue to be moderate
 MR sector growth to flatten after 50% supply growth during the ‘06/’12
Pmx – 2012/’13 – 40 deliveries -- 22 in 2012 & 18 in 2013
MR – 2012/’13 – 156 deliveries -- 80 in 2012 & 76 in 2013
Proj. approximately 12 scrapping/removals for Panamax in 2012
Proj. approximately 40 scrapping/removals of MR’s in 2012
 In 2011 there were 12 Panamaxes and 35 MR’s ≥ 35k dwt scrapped/removed
VLCC Environment
 Shift in demand from US/Europe to China/India has augmented the
impact of supply growth since end 2007 by over 75%
 This was dampened during the 1st half of 2012 by increased WAF/East
volumes and increased AG/USG due to Motiva ramp-up & increased U.S.
light sweet production –
 Both moderated during the 1st part of summer – WAF/East volume returned
during September, but …
 Seasonal reduction of AG exports Q3 – for regional power generation
outweighed impact of increased WAF/East activity for September cargoes
 Potential for a near-term Iranian exports increase (state backed cargo insurance)
to augment increased Q4 oil supply this yr, but not near 100%
 Very soft Q3 market experienced the last two years may become more
pronounced in coming years if regional demand for power requires increased
volumes of direct run crude
VLCC Environment
 2013/2014 to be further impacted by:
 Previously noted tanker supply issues - increased deliveries in 2012 and
2013 – >100+ vessels (or 18%+ Jan ‘12 fleet) scheduled between both years
 2% ≥ 20 years, near 15% ≥ 15 years
 Increased ESPO volumes likely to impact Chinese VL usage – slowly at
first as export ramp-up likely to be gradual – but a source for increased
Afra demand – slides 19 & 20 for further detail
 Above to be countered by increased AG/USG volumes once Motiva
addition back on-line as well as incrementally higher imports due to
increased indigenous light sweet crude requiring increased heavy sour
volumes to meet target slate in USG – approx. avg API of about 27.3 and
sulfur of 1.9% -- Timing to be key regarding Q1 seasonal strength
Oil Demand Impact on
Tanker Market Since Financial Crisis
∆ VL Supply
 Shift in demand from
US/Europe to China/India
have essentially balanced
each other nominally, but
have augmented the impact
of moderate VL supply
growth since end 2007 by
75%+ as previously noted –
supply growth had been
moderate until 2012, but
tanker demand hurt by
changing geography of oil
demand …
Oil Demand Impact on
Tanker Market Since Financial Crisis
∆ Oil Demand
 Globally – demand grew by about 2.7 mm bpd from 2007 through the
end of 2011 and YTD 9/12 has added an additional 0.9 mm bpd
 U.S., Europe, China and India -- four focal protagonists split East and
West of Suez have nearly balanced each other nominally – the rest of the
world “in-effect” providing the growth in oil demand, both occurring to
the detriment of long-haul trades …
Chronology of Evolving Oil
Demand’s Impact on VL Sector
A decline in VL demand of 70 – 80 tankers since the end of 2007
Easing Chinese Demand
Easing Chinese Crude imports – point to softening demand
 Indications are September imports/demand have improved,
will need additional data points to determine if this is a revival
2012 WAF/East Volumes
 WAF/East activity
coincided with a firm
 September was
obvious exception –
lower AG volumes
in 3rd qtr dominate
 Angola has been
beneficiary of
incremental growth
 Future of increased 2012 volume is a question, as Sudan output returns
 Continuing reduction to U.S. demand for imports of light/sweet crude
imply that if Sudan bumps Angolan exports to China - There will
likely be another surprise/revision to trade patterns as the Angolan crude
will need a destination, government budgets should resist reductions 11
to actual output regardless of quotas
U.S. AG Sourcing Vs. North
Dakota Bakken Production
 Increased light/sweet
crude production has
coincided with increased
AG imports.
 Hiatus likely in coming
reporting months, but
will return with Motiva
 2015+ AG sourced crude will increasingly be competing with Western
Canadian sourced crude – planned pipelines will be able to deliver larger
volumes of this crude to USG region
 Additionally – will need to monitor plans for refineries basis crude slates
– in order to run shale oil efficiently significant investment required –
Flint Hills refinery recently announced it will spend $250 mm to 12
better run shale oil
U.S. AG Sourcing Vs. North
Dakota Bakken Production – Con’t
Sulfur content of USG
has generally increased
and the crude has gotten
heavier as Bakken
production has grown –
The July drop in avg.
API is tied to the decline
in Iraqi imports whose
API average for U.S.
crude imports is about
Reduced Q 3 Flows From
AG Expected to Recover
Source: Citibank Commodity
Source: Citibank Commodity
 AG direct crude-burn increases seasonally – a reduction in this usage
and the bullet below point to increased AG crude supply in Q4
 Japan and India have worked out state-backed supplementary cargo
insurance schemes and Korea expects to increase imports going
Suez Environment
 Correlated to VLCC’s due to substitution issues, WAF market –
particularly Sz East movements and to a lesser extent AG volumes
 Concerns regarding USAC refinery closures have been both alleviated
and re-born although the issues driving the re-birth are not a surprise
 2 of 3 refineries to remain open, but alternative crude sourcing to temper
support for sector
 Reduced U.S. crude imports has led to sector owners seeking/finding
increased diversity in demand, particularly in Caribbean, but …
 2013 developments in Russian logistics likely to counter this to some
degree and weigh on sector demand
 Increased Kozmino and Baltic (Ust-Luga) volumes expected to reduce
Black Sea exports which utilize Suez tonnage
 Sudan production shut-in aided WAF/East market during ’12, but
pending 2013 return raises issues regarding level of Chinese imports
from WAF in coming year – to impact both Suez and VL sectors 15
Bakken Production Vs. U.S.
Nigerian Imports
 Bakken, Eagle Ford,
Permian Basin & other
shale oil pushed Nigerian
crude out of USG – USAC
imports from WAF nation
to face similar competition
 USAC refineries usage of
rail delivery of Bakken
crude to compete with
mainstay of Suez delivery
 PBF to have as much as 140k bpd of rail delivery capability at its
Delaware City facility
 Among planned investments at Philadelphia refinery by new
owners is a high speed rail unloading facility at the refinery
Total Chinese Crude Imports
& From Angola Specifically
 Chinese imports from Angola soared
when strife between Sudan and South
Sudan effectively removed Sudan as a
reliable source of crude – with
agreement with the “South” Sudan
production expected to return in 2013
 Chinese imports came off in
total & from WAF during Q3
as AG exports declined –
expect Q4 increase as AG &
global supply increase
Suez Supply
 Largest amount of scheduled NB’s of crude carrier both in number
and percentage of fleet at 117 – over 25% of Jan ‘12 fleet
 8% of beginning of 2012 fleet is ≥ 20 years of age and about 18% is
≥ 15 years of age
 Scrapping through mid-year about 3% of beginning year fleet
 Reality may be a little less onerous as over 40% of the scheduled
2013 NB’s are from China and may be delayed based upon recent
 Approximately 25% of total 2012/2013 scheduled deliveries are
being built in China – majority from the Rongsheng yard
Aframax Environment
 After years of supply pressure that had seen the fleet size grow by about
50% from 2004 to the beginning of this year, supply pressure has begun
to alleviate – growth rate expected to subside this year and 2013
scheduled deliveries are less than half that for 2012
 This will coincide with increased demand as Russian export logistics
undergoes significant changes
 Kozmino volumes to expand – initially believed to about 425k bpd; increased
Baltic volumes is a trend that is already visible
600k bpd Kozmino exports was original plan, but recent reports indicate
current East Siberian production is less than was expected – view is that
production will step up going forward 600k will happen (will be 25 cargoes/mth)
 Two-tier market potential due to 100k MT Russian stems and relatively small
portion of fleet ≥ 110k Dwt
 Anticipation of increased VLCC volumes to USG will aid regional
Aframax market that has suffered since Venezuelan exports to the
U.S. have declined
Historical Russian Logistics &
Aframax Fleet Profile
 110k+ Dwt
portion of fleet is
less than 30%, but
was utilized for
nearly 60% of
2012 Baltic
volume* 20
* As per TNC and Lloyds data
Aframax Supply
 2012 scheduled deliveries are similar to 2011 amount but 2013
scheduled deliveries decline by over 55%
 Scrapping through August has exceeded the 2011 total
 9% of beginning of 2012 fleet is ≥ 20 years of age and about 19% is
≥ 15 years of age
 For all three sectors, 2014 and beyond orderbook is negligible – the
combination of earnings and yard prices have dissuaded ordering
thus far, but if yard prices are reduced during 2013 the market could
be surprised
 A non-fundamental issue to monitor going forward is the EU
implementation of regulations regarding carbon taxes that will set
limits on shipping as well as other industries – this could provide
incentive to order newer more fuel efficient vessels for all sectors –
may become an incentive regarding vessel ordering.
Panamax Environment
 Softening Atlantic Basin fundamentals
 Core demand provided by residual/fuel oil under attack on both sides of
the Atlantic
 European environmental pressures felt most severely on dirtiest crude
 U.S.
 Inventories – most of 2012 below 5-yr range
 Demand – 4 week rolling avg. below 5-yr range for most of 2012
 Production – 4 week rolling avg. lower end of 5-yr range through 2012
 Imports – total imports below 5 yr range 5 of 7 months and below or bottom
of range for 6 of 7 months on the USAC
 Exports – middle or upper end of 5 yr range most of 2012
 However, flexibility has made this the “Traders Sector” – increased
opaqueness of the spot market vs. similar sectors has aided earnings
 Increasing utilization, particularly in Europe for the transport of 22
clean products
U.S. Residual Fuel Picture
Stocks, Demand & Production
U.S. Residual Fuel Picture
Imports & Exports
Other Info
USG imports
not pictured
totaled 105k
bpd in 2008
YTD 7/12
They are 43k
MR Environment –
Atlantic Basin
 Demand began year as a three-legged entity, but has transitioned to
having a dominate single leg
 European, Caribbean and U.S. sourced cargoes all provided or were
perceived as providing substantial cargo volume …
 Closing/idling of Caribbean refineries and decline of European
capacity/production …
Bankruptcy of Petroplus followed 3 other earlier European refineries
closings removing near 1 mm bpd of capacity
 Market has risen and fallen based upon ability of U.S. export market to
absorb tonnage
 2013 expected to experience 200k+ increase in Caribbean refinery
capacity – approximately half of additions in Colombia -- exports vs.
indigenous consumption will impact market
 Return of operation of Aruba or its sale &/or increased European refinery
utilization levels could provide positive surprise for 2013 market 25
U.S. Product Exports
Increasing Dominance of Caribs
 YTD U.S. product exports
continue to firm, but
Caribbean sourced volumes
have declined
 U.S. sourced cargoes have
more than doubled Q1 ‘11 to
Q3 ’12
 Total regional declined early
2012 following refinery
closures, but Q3 activity is
within 5-7% of peak 2011
levels – however, tanker
supply has become
U.S. Product Export
 Total product exports have
more than doubled since 2007
 Diesel exports have risen over
four-fold YTD 7/12 vs. YTD
Preliminary 2013/’14 Outlook
 Timing of Motiva ramp-up will be critical for VL sector earning in 2013
due to its potential impact on seasonally strong Q1 results and …
 Due to correlation of 2 sectors this will also shape Q1 for Suez sector
 Iranian sanctions could cap recovery of VL demand from AG
 2 wildcards to monitor …
 If U.S. allows for limited export of shale crude as a sort of “quality swap” or
similar scheme – it would increase tanker demand & the global
supply/demand imbalance – will traditional producers need to reduce supply?
 Routes utilized in Aframax outlook do not fully reflect changing
Russian logistics, market to be stronger than index below –
increased Baltic rates to aid North Sea market, but reduced Black
Sea volumes expected to result in softer X-Med earnings
 Longer term, the geography of new oil supply will shape the oil
movement and thereby the tanker market
 The issues tied to U.S. product exports/pricing, reduced U.S. 28
distillate yields may shape the “options available” for shale oil
Preliminary 2013/’14 Outlook
Am Early Earnings View
 Earnings on left do not
reflect impact of slow
steaming during last 2 yrs
and for 2013/’14
 Approx. impact of
 $4-$5k aid to VL’s
 $3.5-$4.5k for Suez
 $0.5 - $1.5k for Afra and
smaller dwt sectors
 Post 2014 wider Panama
Canal will impact crude and
clean trades as Aframax &
Suezmax tonnage will have
easier USWC & Asian

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