THE TANKER MARKET

Jun 25, 2008

Nikhil Jain Drewry Maritime Services

The Drift - from Period Market to Spot Markets..

Activity in time charter market, having increased steadily through 2004-07, has declined considerably this year (for the period Jan-May) At the same time, spot charter activity has increased this year (in particular in the dirty spot markets), bucking the trend over the past four years
Time Charter Vs Spot Market Activity (Jan-May)
18,000 16,000 490 480

(000 Dwt)

14,000 12,000 10,000 8,000 6,000 4,000 2,000 2004 2005 10-50K 120-200K Total 2006 2007 80-120K 200+K Spot Market Activity 2008 430 420 470 460 450 440

Time charter activity considerably down (~40%) from 2007

(Million Dwct)

Spot charter activity has increased by about 2% from 2007

Note: Total in the above graph represents total time charter activity

Changing time charter rate - spot market earnings differentials

In the MR segment, while the differential between the average charter rates and TCE earnings was negligible during Jan-May 2007, it widened out to around $6,700pd over the comparable period of 2008 an exception (spot rates affected by rising fleet size and low activity in clean spot markets) In the Aframax segment, the differential between avg. TCE earnings and charter rates has widened out to around $15,350pd in Jan-May 2008 from $5,100pd in Jan-May 2007
MR
50,000

Aframax
6,000 5,000 4,000 3,000 2,000 1,000 2004 2005 2006 2007 2008 TCE

29,000 27,000 25,000 23,000 21,000 19,000 17,000 15,000 2004 TC Activity 2005 2006 2007 TCE 2008

2,000 1,500 1,000 500 -

45,000 40,000 35,000 30,000 25,000 20,000

Period Rates

TC Activity

Period Rates

Note: All rates/earnings are in US$/day and TC Activity in 000 Dwt

Changing time charter rate - spot market earnings differentials

In the Suezmax segment, the differential between the average TCE earnings and time charter rates has risen to a positive $15,700pd in Jan-May 2008, compared to ($1,400pd) in 2007 In the Vlcc segment, the differential between avg. TCE earnings and charter rates has crossed over from being ($13,350pd) in Jan-May 2007 to a positive $14,900pd in 2008

Suezmax
60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 2004 2005 2006 2007 2008 TCE 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 45,000 35,000 2004 TC Activity 2005 85,000 75,000 65,000 55,000 95,000

Vlcc
6,000 5,000 4,000 3,000 2,000 1,000 2006 2007 2008 TCE

TC Activity

Period Rates

Period Rates

Note: All rates/earnings are in US$/day and TC Activity in 000 Dwt

Recent developments..

Tsakos Energy Navigation recently shifted one of its Aframaxes into spot trade from time charter market citing the company commitment towards balanced employment and earnings with flexibility to benefit from market upturns Further, Tsakos Energy Navigation recently announced that the company is considering to keep a series of six Aframax newbuildings (two scheduled for delivery in 2008, three in 2009 and the last one in early 2010) open for spot trading Euronavs CEO Mr. Paddy Rogers said in Marine Money 2008 that companies should take advantage of spot market upswings rather than trade tonnage in time charter market

Rising tanker derivatives fuelling owners expectations of record earnings this year. The TD3 contract for Q3-2008 rose to WS176 (approx. $130,000pd) in the third week of June from WS143 a week ago
Rising volume of paper trade drawing more tonnage into the spot trades. Imarex conducted 1,743 trades of around 25.4m tonnes of crude in May, up around 50% y-o-y However, we have seen a considerable surge in activity in the time charter market in June with a total of 2.7m dwt fixed in the first three weeks of the month compared to 2.6m dwt fixed in May. Some owners are taking advantage of a firm freight market to fix out their tonnage. Charterers, wary of spot market volatility, preferring to fix on time charter Although we've seen an increase in time charter activity in June, the trend may not last for long amid relatively much higher earnings in the spot markets - at least in the near future (till end 2008) as suggested by rising FFA values

$140/bbl Oil Why? and To What Extent? Trillion Dollar Questions

WHY?

TO WHAT EXTENT?

The value of US dollar has declined significantly since the start of the year. Euro to Dollar exchange rates have risen from 1.47 in Jan08 to 1.55 in Jun so far
Financial markets across the globe have slid from the peaks of 2007

Opec maintains its firm stance on production targets, declining to raise output before its next meet in Sep
Further US dollar slump may drive up commodity prices in the near term Geopolitical tensions in the Middle East and insurgency in West Africa continue to affect supplies Volatility in oil prices drawing in traders, speculators, oil majors, investment bankers into futures trade Saudis pledge to increase output by 200,000 bpd may prove insufficient to stall the rise in oil prices Rising global inflationary pressures due to high oil prices may hurt economic growth, limiting growth in oil demand

Opecs spare production capacity has contracted from 3.99m bpd in May 2007 to 2.67m bpd in May 2008
Sluggish non-Opec oil production growth. The IEA has cut 640,000 bpd from non-Opec supply estimates for 2008 since the start of the year Insurgency and rebel strikes in Nigeria have shut-in about 800,000 bpd of output Geopolitical tensions in the Middle East Irans nuclear stance and insurgency in Iraq elevating fears of supply disruption

$140/bbl Oil Why? and To What Extent? Trillion Dollar Questions

WHY?

TO WHAT EXTENT?

Growing oil demand in Asia and Middle East (despite high prices) compensating for the fall in OECD demand
Middle East is itself consuming record levels of oil Middle East oil consumption grew from 4.7m bpd in 2000 to 6.6m bpd in 2007 - a CAGR of 5.0% - outpacing the growth in demand from Asia Pacific (CAGR of 4.8% through 2000-07) Opecs firm stance on production targets amid low Atlantic basin stocks fuelling speculative fears Preliminary data from the IEAs field surveys indicate that the global oil production will peak at 100m bpd in 2030, down by 20m bpd from the estimates five years ago. IEAs repetitive cuts in supply estimates have further fuelled speculative concerns

Retail price increases in developing countries may affect demand growth from Asia
New oil field start-ups in the latter half of 2008 may facilitate higher supplies in the oil markets, easing out the tight balance between oil supply and demand Oil prices at the current level are high enough to support development in alternative fuel technologies High revenues from oil sales may boost investments in E&P activities sustaining growth in future oil supply Market fundamentals point towards an increasing supply demand balance from 0.59m bpd in 1Q08 to 0.85m bpd in 2Q08

Implications on the Tanker Markets

Volatility in oil prices results in an increase in tanker FFA trades, as charterers and traders hedge against rising oil prices
High oil prices have forced governments in developing nations to cut fuel subsidies resulting in higher retail prices (and refining margins). In turn, higher refining margins are likely to boost crude runs, resulting in a further increase in crude demand Though not experienced yet, high bunker prices may dent owners earnings High oil prices can affect the growth in future oil demand particularly from developed and free markets (US and Europe)

Thank You!