Charles R. Weber Company Tanker Report – September 2011

Contents

o Executive Summary – Uneven Road Ahead o The Year So Far 2011 o The Shipping Market o ‘Great Recession’ – Poor political leadership knocks the recovery off course o World Economic Action – G20 still the best hope o Arab Spring ending with a bang? o The Outlook for 4Q11/12 | Broad Brush Background – The big themes | US debt and global

commodity price rises the next obstacles on the road to recovery o Peak Oil – So much depends upon Saudi Arabia | What lies behind the OPEC split? o Potential Drivers for Tanker Market in 4Q11/12 o China – Monitoring the Health of the World’s Second Largest Economy o Tanker Market Outlook for 4Q11/12 | Tanker Supply Prospects | Slippage Update | Freight

Market Scenarios | Calendar of Events 2011/12 o Future Vision – Shipping | Oil Industry – Liquid Natural Gas in the spotlight | Japan’s

Globalisation Imperative o Listed Tanker Companies - Tanker Shares Stuck in the Slow Lane | Analysis of 2Q11 Listed

Tanker Company Results

Appendices

Chronology of Oil Market Events May-August 2011 – and how the oil price was influenced | The Role of Speculators in the Futures Markets | New Crude Oil Production Capacity Coming on Stream | Exploration and Development | Refinery Projects | Oil Industry Rationalisation | Shipping News | IMO Environment Issues

Charles Weber Tanker Report The Charles R. Weber Company Inc. Tanker Report is published four times per year. It reviews important topics within the tanker shipping industry and tanker sectors that are of particular interest. It focuses on changes in tanker trading patterns and changes to fleet supply and demand. Sources Charles R. Weber Company, Inc. Research, International Energy Agency, Energy Information Agency, Lloyds Maritime Information Unit, Baltic Exchange, Global Trade Information Services, OPEC.

Editorial Board Johnny M. Kulukundis Director of Research

George P. Los Senior Tanker Markets Analyst

Contact Details

Johnny M. Kulukundis / George P. Los

Charles R. Weber Company, Inc. Greenwich Office Park One

Greenwich, Connecticut 06831, USA Voice:+1 203 629 2300

E-mail:research@crweber.com

Disclaimer Whilst every care has been taken in the production of this study, no liability can be accepted for any loss incurred in any

way whatsoever by any person who may seek to rely on the information

contained herein. The information in this report may not be reproduced

without he express written permission of the Charles R. Weber Company, Inc.

Copyright

© 2011 Charles R. Weber Company, Inc.

The Charles R. Weber Tanker Report The aim of the Weber Tanker Report is to provide participants in the tanker shipping industry with an overview into the latest developments in the tanker market and the oil industry that it serves, and also to shine a spotlight on the future prospects for these two markets. Crude Oil Market Subjects that are regularly covered are as follows:

• Crude oil supply/demand balances historical and forecast

• Crude oil prices • OPEC announcements and quota changes • US and global crude oil import/export trade

statistics • Crude oil and product stocks • Upstream activity and how developments in the

E & P sector will affect tanker shipping • Refinery developments and scheduled

developments • Monitor “Peak Oil” Debate • Monitor Delivery Schedule and Investment plans

for new crude oil capacity Tanker Shipping Market Subjects that are regularly covered are as follows:

• Tanker earnings trends historical and forecast • Tanker spot fixtures • Tanker investor activity in terms of new orders,

secondhand sales and scrapping • Tanker fleet supply changes historical and

forecast • Tanker fleet demand forecasts – taking into

account the impact of tonmiles • Listed tanker shipping company results and

share performance This publication also tries to illuminate the differences between developments in the various tanker sectors during the most recent period. It also attempts to deliver a snapshot of tanker business for participants to better understand the forces at work within the tanker shipping industry. We welcome our reader’s thoughts and opinions and would be very happy to discuss points raised in this report with you. Given the speed of developments within the tanker market and those markets that support it we take a longer view when compiling this report. In order to offer daily market updates we offer a daily market update of all sectors of the tanker market on our website: www.crweber.com For further information please contact the Charles R. Weber Research Department at research@crweber.com John M. Kulukundis Director of Research

George P. Los Senior Tanker Markets Analyst

Charles R. Weber Company Inc. Telephone: +1 203 629 2300 Fax: +1 203 629 9101 E-Mail: chartering@crweber.com Website: www.crweber.com Mail & Visiting Address Charles R. Weber Company Inc. Greenwich Office Park One Greenwich, CT 06831 USA Tanker Chartering AOH E-Mail: chartering@crweber.com James L. Ford: +1 203 550 0706 Michael J. Moore: +1 203 570 3116 Peter Howard-Johnson: +1 203 940 3936 Lawrence P. Jordan: +1 203 550 1695 George T. Eden: +1 203 550 1687 Daniel O'Donnell, Jr.: +1 203 550 1615 Christos Alexandrou: +1 203 550 1618 Keith D. Abbott: +1 203 550 1719 Basil G. Mavroleon: +1 203 213 6427 Chris L. Aversano: +1 203 570 3871 Kevin Breen: +1 203 550 5552 Laura Mirabella: +1 203 979 8679 Michael J. Sparks: +1 203 564 3324 Juan Raul Gomez: +1 203 554 9557 Research AOH E-Mail: research@crweber.com Johnny M. Kulukundis: +1 203 550 1720 George P. Los: +1 914 325 1652 Operations AOH E-Mail: operations@crweber.com Leonard C. Faucher, Jr.: +1 203 321 5454 Michael P. Alban: +1 914 659 1469 Gerry F. Helmcke: +1 203 979 6240 Edward J. Pavone: +1 203 609 3255 WeberSeas (Hellas) S.A. Telephone: +30 210 453 9010 Fax: +30 210 452 6100 E-Mail: chartering@WeberSeas.com Website: www.weberseas.com Mail & Visiting Address Ygias 1-3 & 2 Akti Themistokleous Str. Piraeus 18536 Greece

Uneven Road Ahead Executive Summary At the time of the last Weber report in April, we commented how, despite very low tanker earnings and strong fleet supply growth at the start of the year, the tanker market had been buoyed by an upward revision in the IEA’s global crude oil demand forecast for 2011. It seemed that if the global economy maintained its slow recovery trajectory, the tanker industry could look forward to a very gradually improving market – albeit trailing somewhat behind most of the rest of the world.

Since that time, tanker earnings have slumped still further in part because of a serious deterioration in the strength of the global economy over the summer which has contributed to a downward revision of global crude oil demand growth forecasts – the latest of which was delivered by the International Energy Agency in September when it revised down its oil forecast for 2011 (89.3Mnbd, +1Mnbd) and 2012 (90.7Mnbd, +1.4Mnbd) by 0.2Mnbd and 0.4Mnbd respectively. The market has also been hit by specific factors such as the release of crude oil reserves by the IEA from the strategic petroleum reserve in June – an action precipitated by the failure of OPEC (in the view of the developed economies) to address the loss of Libyan crude oil exports by agreeing to higher quota levels.

In July 2010, VLCC spot earnings for ME-NAmr collapsed from $38,000pd to $17,000pd and despite positive crude oil demand growth have disconnected from the oil market story under the weight of significant fleet supply growth with the VLCC fleet expanding by 4% ytd.

Weber Tanker REPORT September 2011

Today a double dip recession looms just around the corner(1) – the OECD chart below, taken from its latest Interim Economic Assessment published in September, provides a clear illustration of how close we are to a double dip recession. The organization notes that the economic recovery appears to have come close to a halt in the major industrialised economies. According to OECD Chief Economist Pier Carlo Padoan, “Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up.”

However, it is not all doom and gloom. A recent report by Deutsche Bank reviews a number of US economic indicators that presage recession. For example while observing that confidence has been running in recession territory for some time, it points out that jobless claims are not rising which suggests that the labour market is not collapsing. It also notes that while (federal) government debt has increased considerably as a result of stimulus programmes, balance sheet repair is taking place in the other segments of the economy evinced by “meaningful” falls in business (particularly financial sector) and household debt.

Failure of leadership by the west represents the highest risk to recovery - In some respects the increasingly acrimonious and long running debate between advocates of debt reduction versus advocates of growth stimulus as the best route to economic recovery has become academic. At least for now it is not about trying to find the optimum balance between these two strategies. It is about leadership. It has become clear that governments are not acting fast enough or rationally enough. For example the market has been very unimpressed with the series of weak agreements brokered by France and Germany to resolve the sovereign debt crisis within Europe. It is perceived that the Eurozone bailout agreements have not gone far enough in providing a safety net for struggling countries (when the region can afford to do so), and this has allowed Italy and Spain to get dragged into the firing line (2). (2) As Gordon Brown commented in Independent 7/8/11 France/Germany guilty of treating Europe sovereign debt crisis as a one dimensional issue related to problems with countries on the periphery. “Europe needs to summon up the power to restructure its ailing banks radically, to co-ordinate monetary and fiscal policy, and make fundamental reforms to the euro. Specifically, the Brussels summit needed to accept the inevitability of fiscal transfers; trigger their precautionary facility, including for Italy and Spain; and, as a minimum, expand the European stability fund, underpinning it with a backstop facility far bigger than its current size”. The market was also unimpressed by the US debt limit deal reached in early August because it was arrived at irrationally with politicians artificially creating a crisis (over extending the debt ceiling limit). This fiasco contributed to the US losing its S&P AAA credit rating, which further undermined investor confidence. The market is likely to be even less impressed if President Obama’s new stimulus initiative announced in early September does not get through in some form. To placate the markets governments must show leadership in the form of (1) a return to the world working together as it did when the Great Recession first hit, and (2) decisive action to support faltering nations. The G20 was the forum which facilitated the decisions that prevented a spiral into global economic depression, and this body remains the best hope to avert a double dip. The next G20 leadership summit is in Cannes on November 3-4 and the world will be watching. However, the mood music leading up to this meeting is not good. Global leadership is in many respects becoming more rather than less fragmented. For example developed countries are still turning to the G7, while developing countries (BRICS) have set up their own forum. However, there are also some positive signs The BRICS meeting April in Beijing produced the Sanya Declaration which looked to the G20 to resolve the global economic crisis (3).

(3) Extract from the Sanya Declaration: “We support the Group of Twenty (G20) in playing a bigger role in global economic governance as the premier forum for international economic cooperation. We expect new positive outcomes in the fields of economy, finance, trade and development from the G20 Cannes Summit in 2011. We support the ongoing efforts of G20 members to stabilize international financial markets, achieve strong, sustainable and balanced growth and support the growth and development of the global economy”. (15) We call for a quick achievement of the targets for the reform of the International Monetary Fund agreed to at previous G20 Summits and reiterate that the governing structure of the international financial institutions should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries. (16) Recognizing that the international financial crisis has exposed the inadequacies and deficiencies of the existing international monetary and financial system, we support the reform and improvement of the international monetary system, with a broad-based international reserve currency system providing stability and certainty. We welcome the current discussion about the role of the SDR in the existing international monetary system including the composition of SDR's basket of currencies. We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economies. We call for further international financial regulatory oversight and reform, strengthening policy coordination and financial regulation and supervision cooperation, and promoting the sound development of global financial markets and banking systems. (17) Excessive volatility in commodity prices, particularly those for food and energy, poses new risks for the ongoing recovery of the world economy. We support the international community in strengthening cooperation to ensure stability and strong development of physical market by reducing distortion and further regulate financial market...

The east remains the cradle for growth and the main driver of the recovery – if global leaders are able to find common ground and restore confidence to the wider market then Asia, and in particular China, remains well placed to continue to underpin the global economic recovery. China is not immune from the deteriorating fortunes of developed economies over the summer, but the China Confidential (Sep 8) argues that, “The month of August was marked by a general resilience”, and it anticipates a smooth and gentle slow down. Nevertheless, the China Confidential does not underestimate the challenges facing China as it seeks to continue the transition from a growth model based on exports to one based on domestic consumption. Inflation remains the most public issue acknowledged by the Chinese leadership and is expected to remain at around 6.5% for the foreseeable future. Meanwhile, corruption and the emergence of the shadow banking phenomenon (see section 3.2: China – Monitoring the Health of the World’s Second Largest Economy) are two of the most important problems not acknowledged by the Chinese leadership. Geopolitical risk still centred around the Middle East – The Arab spring is threatening to extend further with Libya, Syria, Israel and Egypt still in ferment, while the 10 year anniversary of 9/11 has added to uncertainty in America and beyond and exacerbated fear of and hostility towards the Middle East. All of these factors are combining to fuel a sense of uncertainty that is indirectly undermining confidence in the strength of the global economic recovery particularly in developed countries. Negotiating the 9/11 anniversary period without terrorist intervention - a gradual and smooth reintroduction of Libya’s 1.5Mnbd crude oil export capacity over the next 12 months – and the peaceful transition to democratic elections in Egypt and a normalisation of its relations with Israel will help to push geopolitical bad news down the news agenda. Another negative wild card event will be required before a fourth oil crisis strikes – in the lead up to the third oil shock in 2008, oil demand was rising while commodity prices were rising faster. The concern was that high oil prices threatened to turn demand growth negative. In the end, the shock when it came was caused by the disastrous and largely unheralded mismanagement of sub-prime mortgages. Although, high oil price did not cause the crisis, this factor contributed to the pace of demand destruction. At the beginning of 2011, oil prices were again starting to rise and the threat of demand destruction was once again under discussion. However, the sharp deterioration in economic confidence during the summer has seen a moderation in oil prices. In part as a result of this market readjustment, demand growth forecasts for 2011-12 remain positive – albeit less positive than at the beginning of the year. The evidence that market mechanisms are working sufficiently well to allow the oil price to adjust to market fundamentals suggests that speculators will not be the cause of a fourth oil shock. This – if it comes - will require either another wild card event like the sub-prime crisis or the failure of government to instil confidence in business and consumers to start investing and spending again. Nevertheless shipping is running out of time - In 2Q11, the tanker sector(4) recorded its largest cumulative net profit loss since the onset of the great recession in 4Q08. Worse still seven of the last eight quarters have been in negative territory. The large cash reserves built up since the emergence of China as a global force in 2003 and consolidated in the boom years of 2007-2008, have largely now been dissipated.

As the first shipowners have started to succumb to market pressure, the sector alert code has been switched from yellow (watch) to amber (warning) – and for some individual companies the situation is even more dire. Our analysis in chapter 5 shows that the situation for tanker shipping is worse than for the other main shipping sectors. Indeed, some industry participants are counting survival over just a few quarters unless the market turns upward. Shipping still disconnected – tanker fleet growth is projected to be close to 7% in 2011 compared with demand growth forecast of 1.2%. Even taking account of the tonmile demand accelerator created by the disproportionate growth in long haul trades such as Middle East to China, demand growth will be overwhelmed by ballooning supply for the foreseeable future and ensure that tanker rates remain depressed for the remainder of the year even if bunker prices ease in line with a more subdued oil price. If the world economic recovery remains on track then shipping will benefit from gradually improving fundamentals – Looking into 2012 and beyond the supply-side pressure will moderate with 38MnDwt and 21MnDwt currently scheduled for delivery in 2012 and 2013 respectively compared with more than 52MnDwt in 2011 (42MnDwt in 2010). Aframax size vessels and smaller are expected to grow significantly slower than the Suezmax and VLCC classes. The chart right shows just how sharply the tanker orderbook has fallen over the last two years from a peak of 185MnDwt in September 2011 to less than 90MnDwt today. Of course if the rumoured Chinese order for 80 VLCCs goes ahead then the supply side equation will be reframed again in a very sickly way. The question for tanker owners – assuming crude oil demand growth does not soften further - is whether the slowdown in fleet growth will come quickly enough to ease the pressure on earnings. Consequently, the market is focused on factors that might reduce supply in the short term. Scrapping, slippage, layup, storage, conversions and slow steaming are some of the elements that may act to moderate fleet growth. Only glimmers of optimism - There are some tangible signs of increased interest in the sector. Scorpio Tankers and Global Ship Lease are currently popular with institutional investors who have bought 54% and 16% of their overall value in the last quarter – while Diamond S. Shipping, which is backed by investment company First Reserve, announced in early August that it had entered into a definitive agreement to acquire 30 medium-range refined product carriers to add to its fleet of ten tankers under construction in Korean shipyards. Few shipowners are talking about an early end to the poor run of results. Indeed survival remains the watch word. The big owners in particular seem to be preparing their shareholders for a protracted downturn. For example - while suggesting that the market would probably not get worse, Frontline CEO Jens Martin Jensen indicated that he did not expect a recovery before 2016. This year also appears significant to OSG which has pushed back its major refinancing needs to the end of 2016 with the completion in May of a USD 900Mn unsecured forward start revolving credit agreement that matures on December 31, 2016.

We are now entering a critical phase for the world economy and a negative resolution could break the fortunes of some tanker shipowners. The risk of double dip recession is higher than at any time since the onset of the Great Recession in 2008. The prolonged slump in tanker rates means that some owners will not be able to withstand a return to recession especially if this coincides with a fourth oil shock. Even if a return to recession is avoided this provides no guarantee of an improvement in rates due to the ongoing fleet supply problems within the tanker sector so the pressure may continue to build whatever happens to the world economy.

(3) The chart left shows the development of global GDP growth over the last 50 years. This confirms both how serious the recession of 2009 was, and how infrequently the world is hit by recession. It also shows that the world has not seen a double dip recession over this period.

(4) The analysis covers 19 listed tanker companies for which we have second quarter 2011 data

Tanker Rates/Prices

Since the last Weber report in April, tanker rates both in crude and products have continued to deteriorate. The market is close to the lows of 2009 and the sustained pressure on owners means that some have now started to go to the wall. Omega Navigation filed for Chapter 11 in July, while the small Japanese owner, Eagle Holdings declared bankruptcy in the same month. Samho Shipping, the South Korea chemical tanker operator is the latest reported casualty, and follows on from the South Korean multi fleet operator Korea Line which went bust earlier in the year. The recent downward revision to global demand forecasts mean that pressure is likely to build still further with the market set to continue on an unsustainable trajectory.

High bunker prices are contributing to the pressure on tanker shipowners. While crude oil prices have turned down since the end of April, bunker prices have remained stubbornly high as is revealed by the chart (below) comparing WTI and Singapore 380cst

Secondhand prices are close to their 2009 low point, and the sale of the 2000 built NYK owned VLCC Tenzan in August for USD36Mn – around 30% below the last comparable deal – suggest prices may be set to fall even further. However, the lack of liquidity in the market makes accurate price estimates difficult to determine – a repeat of the situation in 2008 at the onset in the Great Recession.

Newbuilding prices are less volatile than those for secondhand tonnage. The high price of steel is a key factor underpinning prices for newbuilds – although steel prices have come off somewhat in recent months.

In contrast to steel prices, demolition prices remained

resolutely high through mid-year, although there have been signs of price weakness in August.

Tanker Fleet The tanker market’s intractable issue of over supply continues to dog the market with further unrelenting fleet growth. Slippage remains a mitigating factor but deteriorating demand factors have swamped any benefits.

2011 is set to be the record year for tanker deliveries. It is estimated that 24MnDwt entered the market in 1H11 compared with 18MnDwt in 2H10 as supply side pressure piles up.

It might be thought that the depressed freight market would have already triggered a renewed burst of scrapping but deletions have actually been declining in the year to date. During a scrapping cycle, it is normal for vessels approaching 5th special survey at around 25 years to be most under pressure to scrap. Even if these vessels have been written down, the prospect of heavy repairs would mark the end. However, the surge in single hull scrapping peaked last year and took out much of the 20+ fleet leaving relatively few obvious scrapping candidates.

It is interesting to compare the current depressed state of tanker scrapping with the much higher level of demolition in the dry bulk sector which was not impacted by single hull phase-out.

Denied a safety valve that would normally be afforded by the removal of older tonnage, the pressure is being heaped onto owners operating vessels across the age spectrum to consider ways to exit the market either permanently or temporarily. The owners of brand new tonnage are particularly exposed as charterers are opting in some cases to avoid tonnage that has yet to receive vetting approvals and has yet to build a track record of operating reliability.

The Year So Far - Chart Wall

The decision to layup vessels, which in some other shipping sectors is a viable intermediate term option, remains generally out of the question for tanker owners over fears of loss of vetting status – although Frontline announced in August that it would be laying up some of its VLCCs. New deliveries are the most obvious candidates for short term or soft layup as they have yet to acquire approvals. The FPSO conversion market continues to be buoyant with 6 sales reported since March and remains a possible route to exit the market. Of the 53 FPSO’s on order 25 are converted tankers.

Investor Activity Shipowners remain focused on minimising debt rather than making new investments. Ordering had started to fall at the end of 2010, but during 1H11 reverted to the very depressed levels of 4Q08-2Q09. With earnings expected to remain low, total 2011 orders are likely to fall below the 10MnDwt ordered in 2009 and well below the 32MnDwt ordered in 2010.

South Korea was the most active shipbuilding country picking up half of the 43 tanker orders placed since April 2011.

Large product tankers were the most popular ship type ordered in

2Q11 with Scorpio and Norden responsible for almost half of the 20 orders in this sector. Interestingly almost all of the tanker orders placed since April 2011 have been for the account of independent shipowners. It seems at least some owners feel strong enough to look beyond the current economic crisis. Like the dry bulk sector the precipitous fall in new ordering has resulted in a dramatic and sustained slide in the size of the tanker orderbook.

As in 2009, the fall in secondhand prices (described earlier in this section) reflects the collapse in interest in secondhand tonnage with many owners struggling to survive a period of sustained losses. More than half of the listed tanker companies reporting 2Q11 net profit are showing losses for two or more consecutive quarters. Even those owners that are still in profit are running scared of poor supply and deteriorating demand prospects.

Crude Oil Demand Crude oil demand forecasts have been revised down in recent months. However, the latest IEA forecast for August still anticipates solid if unspectacular growth of 1.2Mnbd in 2011 and 1.6Mnbd in

2012. As yet, there is sign of a return to the period of demand destruction that crushed the market in 2008-9

Crude Oil Production The issue of whether the world is well supplied with oil has become a headline issue following the loss of Libyan oil from the market, the failure of OPEC at its June meeting to agree to increase production quotas, the continued acrimony and in fighting within OPEC, and its decision not to meet until December - despite estimates from some like Paul Horsnell at Barclays Capital that the call on OPEC crude will be 1.3Mnbd higher in 2H11 than during 1H11

World crude oil production did increase in June primarily as a result of Saudi Arabia’s unilateral decision to increase its own output by 0.75Mnbd. However, some commentators have pointed out that Saudi has done little to make its export grades more attractive to refiners by increasing discounts against benchmark crudes. Spare capacity is estimated by the IEA at 3.3Mnbd, which is getting uncomfortably close to the danger level of 2.5Mnbd seen in 2008. However, the victory of the rebels in Libya has led some to estimate

that production could be back up to 1.2Mnbd within a year.

Apart from Saudi Arabia, Iraq, Russia, Nigeria, Kuwait, UAE and Venezuela have helped underpin crude oil supply in 1H11. North Sea production has continued its decline in both the UK and Norwegian sectors.

Crude Oil Exploration World rig activity remains ahead of levels seen in 2009 and 2010. Deep water offshore persists as a key focus and this was boosted by the announcement by Petrobras that it planned to invest USD225Bn during 2011-2015 with exploration and production accounting for 57% of the budget. Exploration in the Arctic region is poised to take off with Russia and Norway embarking in August on an extensive survey in the Laptev and East Siberian Seas. Negative news for the exploration market included the UK government’s decision in July to impose a windfall tax on the North Sea sector.

In the US most new activity has been land based with offshore exploration still being treated with great nervousness by the US government. However, Shell Offshore Inc. received approval in August to drill up to four shallow-water wells in the Beaufort Sea beginning in July 2012.

Crude Oil Stocks

The latest OECD government stock data does not reflect the IEA’s decision in June to draw down 60MnBbls from the various member’s strategic reserves as a way of moderating the oil price and sending a signal to OPEC that it did not believe it was doing enough to ensure the world was well supplied with oil.

In the US, the latest weekly data shows that industry crude oil stocks are in line with 2009-10 levels, while gasoline and distillate stocks are on average somewhat lower.

Crude Oil Prices Crude oil prices climbed steadily during the first four months of 2011 almost exactly tracking the precipitous rise seen in 2008 in the lead up to the Great Recession. However, the 2008 and 2011 trajectories departed dramatically from the end of April as oil prices headed downwards. The decline in oil prices coincided with the death of Obama Bin Laden, but the key factor in

turning oil prices down was an indication from the US that a third round of quantitative easing – blamed by some as the root cause of spiralling oil and other commodity prices – was likely to be a non-starter. Other factors behind the onset of the decline included S&P’s decision to cut Japan’s ratings outlook to negative, the realisation that Europe’s sovereign debt crisis was not being brought under control and perhaps even the start of a G20 enquiry into oil price transparency

Since May, oil prices have rallied on several occasion only to be knocked back by mounting concerns over the strength of the US and European economic recovery. Most other commodities have also seen significant price weakening although generally prices are still above 2009-10 levels.

Concerns about the strength of the recovery have never gone away since the onset of the Great Recession and nor has investor preference for investing in gold with gold prices continuing to break record high levels.

China Crude Oil Imports China is not immune to the weakness in the western economies with its export industries most at risk from a double dip recession. It is estimated that 30Mn factory jobs were lost when the Great Recession struck in 2008. There is also a growing awareness that China has its own set of problems most notably with inflation and debt. China’s debt issues have been caused by a burgeoning underground banking system that has facilitated massive levels of high risk local government debt. This debt is large enough to make another financial stimulus package – on the scale of the one delivered in 2008 – very difficult to engineer. However, most commentators believe that the Chinese economy has enough strengths to avoid a hard landing even though GDP may be scaled back from around

9% in 2011 to 7% in the event of a double dip in western economies. This confidence comes from faith in structural growth drivers e.g. (1) the revolution in the rural economy (2) the opening up of the western provinces as a new cheaper manufacturing base, and as a way of stimulating new transport projects. These growth drivers amongst others are helping to shift the Chinese growth engine from the vulnerable export sector to its expanding domestic consumer market. Confidence in the Chinese growth story is also based on a belief that the Chinese government has the tools to boost the economy in the event of a downturn even if a second massive stimulus in unlikely. The FT China Confidential argues that targeted investment in social housing and in irrigation projects may be the Chinese government’s preferred strategy in a downturn.

Chinese crude oil and products imports have been relatively lacklustre in recent months.

The Year so far 2011

The Tanker Shipping Market ‘Great Recession’ – Poor political leadership knocks the recovery off course The chart (below) shows the skeleton of ‘news’ events within the financial/economic system that precipitated the current recession, and the key events so far on the long road back to global economic health. It also shows the sometimes contrary path of tanker freight rates, which soared in the summer of 2008 apparently oblivious to the fermenting crisis (of course China crude and product imports were still strong), and then during the middle of 2009 remained depressed even though economic recovery appeared to be taking root as rapid fleet growth, high stock levels and spluttering demand acted as an anchor.

At the time of the last Weber report in April, the global recovery from economic recovery was beginning to look more challenging. Although stock markets were still performing solidly, high oil prices threatened demand destruction, there was mounting evidence that the US did not have the political will to manage the transition from stimulus to austerity, and the European debt crisis kept resurfacing. Continuing civil unrest in the MENA region and the Japanese earthquake in March failed to knock the recovery off course in 1H11, but investors were becoming increasingly nervous and finally (and predictably) there was a dramatic stock market crash in August. There were two key triggers leading to the crash. Firstly the failure of European leaders to resolve the European sovereign debt crisis which looked like it might now engulf Italy and even France – and secondly, the farce in the US where Democrat/Republican brinkmanship pushed the US to the brink of

August 2011: Poor political leadership from western governments allows European and US sovereign debt crises to undermine investor confidence and stock markets crash. Tanker rates continue slow reretreat that started in Feb 

Oct 3 2008: The fightback begins ‐ The US House of Representatives passes a USD700bn (£394bn) government plan to rescue the US financial sector.  Nov 9 2008: China reacts – China reveals USD586Bn stimulus package. Second announcement (Mar 4, 2009)  beefing up+ stimulus package  

2nd and 3rd

Quarter 2009:  Tanker freight rates decouple due to structural problems with fleet supply.   4th Quarter 2009: Share prices maintain momentum –and tanker freight rates finally start to improve – even starting to close the gap on share price gains. 

Dec 2009: Copenhagen Climate Change Conference –fails to secure deal  May 2010 – Greek bailout: so called PIIGS run claimed its first victim in May when Greece was bailed out in a move that calmed market. Fleet over supply problem causes tanker freight rates to decouple again but more seriously.

Apr 2 2009: G20 London Summit – Depression off the Table – some discord about the balance between increased stimulus and new regulation – but present unified front that injects some much needed confidence not to mention USD1.1Tr of spending pledges. The follow up G20 summit in Pittsburg in Sept reinforced the collective approach 

4Q10 – QE2 makes impact: Nov 3 Fed pumps USD600Bn into the US economy in what FT.com describes as an all out bid to shore up economy.   April 2011 – Commodity price rises:  High oil prices threaten demand destruction and prospect of derailing the recovery, but market steady

bankruptcy, and which contributed to the S&P rating agency finally withdrawing its triple-A rating (after warnings over several months)

Investors finally lost confidence in the strength of the recovery because of poor political leadership by Western governments. Unless EU leaders resolve rather than fudge the regions sovereign debt crisis, and unless the US can convince the market that indulgent internal squabbling was a temporary illogical blip, then a double dip recession - considered unlikely at the start of July – may well take hold. The chart below shows in detail the events that have moved the oil market so far in 2011.

Analysts from CGES commented at the beginning of August on the failings within Europe, “At the moment, policy makers seem incapable of dealing with the problems threatening global recovery, having precious few options left. Political opposition—particularly in Germany—to the bailouts for the Eurozone’s weaker members, as well as confusion about the European Central Bank’s role in the crisis, has meant growing uncertainty in the bond markets about the European Union’s ability to deal with its members’ debt problems”. The new head of the IMG Christine Lagarde agrees with the analysis from CGES. At the Jackson Hole conference at the end of August, she commented, “We need urgent and decisive action to remove the cloud of uncertainty hanging over banks and sovereigns. Financial exposures across the continent are transmitting weakness and spreading fear from market to market, country to country, periphery to core.

Jan 26 – IMF warning to US. S&P downgrades Japan

Feb 14 – Mubarak goes, but Libyan oil production down 75%

Jan 11 – Japanese earthquake

Mar 19 – first serious unrest in Syria. UN start to enforce Libya no fly zone

Apr 6 – Portugal to seek EU bailout

May 2 – Bin Laden killed. Europe acts to weaken Euro

May 12/13 – IEA downgrades 2011 oil demand by 0.2Mnbd, but strong 1Q11

Jun 2- indications that US and China cooling. Jun 7 – US confirms no QE3 and offsets OPEC’s failure to agree quota increase + Syrian army crackdown (2000+ dead by end July)

May 27 – G8 Deauville

Jun 23 – IEA releases oil from SPR

Jun 28 – war of words starts with OPEC. Jun 29 Greek Parliamant passes austerity measures. Jul 8 – NATO attacks Libyan oil fields for first time + indications that Saudi may be backtracking on pledge to increase production by 1Mnbd. Mkt seemingly unconcerned about US debt talks

End July – Italy looks like it might get caught in sovereign debt crisis. Rating agencies talk of imminent downgrade of US credit rating

Aug 9 – US Fed to leave interest rates unchanged for two years. President Obama proposes new stimulus package at the start of Sept.

Negative price pressure

Positive price pressure

(a) Shipping indices as lead indicators of global activity – Crude oil is the world’s energy feedstock and so in theory should be an ideal lead indicator of economic activity. However, the case for using tanker rates for this purpose is actually quite weak because of (1) the attempts by OPEC to manipulate oil prices by micro managing the amount of crude oil it produces, (2) the issue of tanker oversupply that is currently distorting the performance of the sector. The Baltic Dry Index is often considered a better lead indicator of economic activity because the absence of pervasive cartel activities and because unlike stock and commodity markets it is devoid of speculators. It is also considered a good lead indicator of where end prices are heading. Of course, the BDI (and any other shipping indicator) works best as a lead indicator of economic activity when vessel supply is consistent – which it rarely, if ever, is. It is also worth noting that shipping rates are of no use whatsoever in spotting financial tsunamis. The chart compares the BDI and BDTI and Dow Jones indices. It is interesting to note that dry bulk rates fell like a stone from mid-year 2008 – much faster than the BDTI and Dow Jones. This reflected in part the dry bulk market’s sensitivity to the rise in counter party risk caused by the profound loss of confidence in the global financial system sometime after the Beijing Olympics in August and the demise of Lehman Bros in September. The major cargo owners in the tanker sector are leading international oil companies with very low perceived risk of default. During 2H08, therefore, the tanker sector may have been in some respects as a more accurate indicator of global economic activity – although the brief rally in tanker rates at the end of the 2008 may be seen to reflect the intrusion of market sentiment over fundamentals. From the start of 2009, the three indices have performed very differently. It would seem that the Dow Jones has provided a good indication of market sentiment. Its steady upward trajectory lasting until the summer of 2011 reflected the generally held conviction that the word economy was gradually pulling of recession. The stock market slump in August 2011 reflected the first real concern that the recovery might not be on track after all. The path if the BDI from tracks a slow

improvement during 2009 – a faltering 2010 – and a collapse in 2011 as new tonnage entering the market swamped the gradual improvement in trading volumes. The BDTI has performed worst of all – reflecting the contraction in trade volumes in 2008 and 2009 and thereafter deteriorating supply conditions.

World Economic Action – G20 still the best hope

In London April 2009, the G20 succeeded in bringing the developed and developing world together to deliver the coordinated action that was required to fend off economic meltdown. Almost as fundamentally, the emergence of the G20 seemed to presage a change to the way the world economy would be run in the future. By opening up the top table to countries from the emerging markets (EMs), the established western powers now seemed prepared to accommodate the clear shift in the

global economic power base that had taken place over a number of years. The G20 appeared set to be the most important economic decision making forum in the years ahead. The economic clout of the EMs is without question. EMs represent 50% of global GDP, based on purchasing power parity, and one third of it when FX rates are accounted for. Additionally, EM central banks, nursing healthy surpluses, own 50% of US Treasuries – compared to 90% of Brazilian debt owned by Brazilians. About 70% of all EM FX reserves are in Treasuries. Adding to EM firepower, the US Federal Reserve’s USD73bn of usable foreign reserves – effectively its own reserves excluding gold - is truly dwarfed by China’s USD2.5trn, Saudi Arabia’s USD1.3trn, South Korea’s USD350m, Indonesia’s USD330bn and Brazil’s USD220bn. However, since the London meeting in 2009, the G20 has failed to live up to its promise and may be set to become just another of the many talking shops. Progress started to stall when the November 2010 G20 5th leader’s summit in Seoul quashed the idea of a global stimulus. The sense that the G20 was losing momentum was reaffirmed when the April 2011 G20 working meeting of finance ministers in Washington produced only a vague communiqué of intent about member states “aiming to promote external sustainability” and “pursuing the full range of policies required to reduce excessive imbalances”. The failure to deliver coordinated and decisive action led to squabbling between members of the G20 over what each was doing in their own backyards. Worse still the squabbling has seemed to translate into a rise in protectionism despite a commitment both at the Toronto (4th leader’s summit in June 2010) and the Seoul summits, that they would "resist protectionism until the end of 2013". The OECD and WTO have been left trying to hold the G20 to account and warning of dire consequences if this shift to protectionism continues. As the G20 struggles to even stick to previous agreements, it has left itself open to criticism. Liam Halligan commented April 16, 2011, “The G20 is clearly failing as an effective decision-making body. Its member states disagree entirely about the reasons behind recent global financial instability, so have no shared analysis of what to do”. Halligan sees part of the problem to be continuing discord between the developed and emerging nations. “The big emerging markets, in particular, are furious that the US seeks to wield the dollar’s reserve currency status as a “weapon”, using so-called “quantitative easing” to export inflation and debase the

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value of America’s debts to the rest of the world. The “emerging giants” also complain that, while broader than the G7, the G20 is still run by Western powers essentially to promote their own interests”. With fractures appearing within the G20, it is no surprise that emerging nations have been seeking to establish new forums. The April 2011 G20 working meeting in Toronto was overshadowed by a simultaneous gathering on the Chinese island of Hainan, attended by the leaders of Brazil, Russia, India and China – the so-called BRIC group. The deteriorating economic conditions around the world mean that the G20 is about to face its biggest challenge since the onset of the Global Recession when it meets for the 6th summit of leaders in Cannes, France November 3-4. It had been thought that the key targets of this gathering would be the reform of the international monetary system and the creation of a G20 secretariat to oversee implementation of the bloc's decisions. However, the threat of a return to global recession means it is time for the G20 to do more than build the structures of its power, but to step up once again to demonstrate the power of cooperation. At the Jackson Hole conference at the end of August, the new head of the IMF, Christine Lagarde stressed the importance of cooperation when she said, “As in the first phase of the crisis, we have reached a point where actions by all countries, doing what they can, will add up to much more than actions by a few.” Table showing timetable for G20 full meetings (a) The first G20 leaders’ summit was held in Washington November 14-15, 2008

(b) The first G20 finance ministers’ and central bankers’summit was in 1999. The G20 was established in the wake of the 1997 Asian Financial Crisis, to bring together major advanced and emerging economies to stabilize the global financial market.

Date   Event   Location  

2011   Sixth G‐20 Summit   Cannes, France, (Nov 3‐4) 

2012  Seventh  G‐20 Summit  Mexico 

Arab Spring ending with a bang?

Timeline - the Arab Spring looked momentous as the Tunisian leadership fell and dissatisfaction started to spread through North Africa and the Middle East reflected in unflinching street protests in the face of often violent attempts at suppression.

When the Egypt President fell the Arab Spring seemed to be gaining momentum with Libya by now embroiled in civil war – and Yemen, Syria and even Saudi being drawn into the storm However, as spring turned to summer much of the unrest had been dissipated across the region. Where hotspots remained in Libya and Syria a sort of violent status quo seemed to have been established. For tanker shipping, the Libyan civil war had by April knocked out almost all of Libya’s 1.8Mnbd crude oil production (1.3Mnbd crude oil exports, and 0.1Mnbd crude oil product exports) and the market was resigned to a long period without this source of crude oil supply. However, events changed dramatically for both Libya and Syria in August.

In Libya, operation Mermaid to take Tripoli (Mermaid being a longstanding nickname for Tripoli) commenced on August 20th. Events moved rapidly with the rebels feeling able to declare victory by August 24th despite continuing battles with pro Gaddafi forces. The rebel leadership has already committed itself to rebuilding its crude oil industry. It reaffirmed a statement made by Nouri Burruien, the then newly appointed director of the Libyan rebel National Oil Company in June that it would take 10 months to a year after hostilities end for Libya to restore its oil production to the pre-crisis level of 1.6Mnbd

In Syria, President Bashar al-Assad’s strategy of repression finally became too extreme for the international community with more than 2000 rebels reported killed. On August 18, the US announced it would ban Syrian crude oil and product imports. The US imports almost no Syrian crude oil and just 0.1Mnbd of products, but worse was to follow towards the end of August with the EU – which imports most of Syria’s 0.15Mnbd crude oil output - committing to ban imports. The trade with Europe was worth USD4Bn to Syria in 2010 – and the embargo will significantly increase pressure on the regime.

The most important factor for tanker demand is global crude oil demand – but it is also important that the world should be well supplied with oil. The prospect of a return of Libyan crude oil – albeit over a period of many months – will offset the disappearance of Syrian oil and will help ensure that oil supplies are more plentiful than before. This in turn will mean that upward pressure on crude oil prices is mitigated – which is crucial as inflating oil prices could potentially become a significant drag on the global economic recovery.

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Libyan crude oil exports 2000‐2010

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The Outlook for 4 Q11/2012 Broad Brush Background Getting the balance right between debt reduction and growth The chart below (see red line segments) shows how oil demand went backwards (x-axis) as a result of the first oil shock in 1973 and also as a result of the second oil shock in 1979 (oil price spikes shown on y-axis). Although in 2008 the oil price was more of a symptom of the malaise rather than a catalyst for recession, oil demand went into reverse again - with 2008/9 being the first consecutive years of contraction since 1982/3.

Following the first oil shock, demand contracted for two years before recovering strongly from 1976. The impact of the second oil shock was more protracted with demand contracting for four years before slowly starting to recover from 1984. Despite continuing fears of a double dip recession, the third shock ran its course after two years with oil demand picking up quite strongly in 2010. The pre-conditions for a fourth oil shock dissipate Oil price gains at the start of 2011 (red line – chart right) mirrored the surge in oil prices in 2008 (blue line) and the pre-conditions of a new oil shock appeared to be lining up. Action by Europe to weaken the Euro seemed to arrest the oil price gains (Brent had got as high as USD127Bbl Apr 8). Deteriorating investor confidence in the strength of the global economic recovery took any remaining momentum out of oil prices. Nevertheless, demand destruction is still a possibility with forecasting agencies downgrading their crude oil demand growth forecasts for 2011 and 2012. Economic contraction rather than high commodity prices is now the primary focus of concern.

Global Cooperation is the key to the next phase of the recovery – but where is the vision and where are the leaders In 2008, the global recession was triggered by a shock that came out of the blue – the subprime crisis. The financial meltdown was so massive and far reaching that global leaders had no choice but to come together and forge a common survival strategy. In 2011, the weakness of the global economy is all too apparent, but – unlike in 2008 - world leaders find themselves at a cross roads rather than dealing with a crisis. However, the situation is just a dangerous as in 2008 with a double dip recession the possible price of taking the wrong turn. At this turn in history, the mood music is not very good at all. The cooperation of 2008 has been replaced today by divisive wrangling. Bitter disputes about how to approach the next phase of the recovery are breaking out everywhere. For example between Democrats and Republicans, China and United States, developing and emerging nations Governments must face the fact that their leadership has failed to sustain the recovery and that a new path must be taken. It is generally agreed that governments must now put their differences aside again and work together. In order to do this a new vision is required – a vision for consumers and businesses (particularly those in the western economies) that can give these two segments enough confidence to encourage a return to their normal patterns of spending and investment. But the new vision is showing no signs of materializing let alone the leadership that might be required to sustain it. In theory, all the risk factors are well documented and governments claim that they have all the necessary tools to plot a recovery. However, fundamental strategy differences have polarized between those for whom debt reduction is the most important element of a recovery strategy and for those focused on the policies required for growth. It has been argued that this exact impasse was a key contributing factor to Japan’s lost decade in the 1990s – when policy makers flip-flopped between austerity and stimulus – unable to find the right balance between debt reduction and growth. Western leadership has failed most miserably in recent months, and it is all too easy to see how this crisis of leadership may drag on until another economic crisis forces governments to act together. However, some commentators are pinning hopes that the next G20 meeting (November 3-4) will ensure world leaders at least head off down the right path to recovery. Europe – the weakest point in the chain The ongoing sovereign debt crisis on both sides of the Atlantic is thought to be the most potent of the known risk factors. The way out of the crisis in Europe appears even more challenging then getting democrats and republicans to work together. According to the IMF, there are three key steps that Europe should take: First, sovereign finances need to be sustainable. Such a strategy means more fiscal action and more financing. It does not necessarily mean drastic upfront belt-tightening—if countries address long-term fiscal risks like rising pension costs or healthcare spending, they will have more space in the short run to support growth and jobs. But without a credible financing path, fiscal adjustment will be doomed to fail. After all, deciding on a deficit path is one thing, getting the money to finance it is another. Sufficient financing can come from the private or official sector—including continued support from the ECB, with full backup of the euro area members. Second, banks need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis. The most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary. One option would be to mobilize EFSF or other

European-wide funding to recapitalize banks directly, which would avoid placing even greater burdens on vulnerable sovereigns. Third, Europe needs a common vision for its future. The current economic turmoil has exposed some serious flaws in the architecture of the eurozone, flaws that threaten the sustainability of the entire project. In such an atmosphere, there is no room for ambivalence about its future direction. An unclear or confused message will add to market uncertainty and magnify the eurozone’s economic tensions. So Europe must recommit credibly to a common vision, and it needs to be built on solid foundations—including, for example, fiscal rules that actually work. The situation is getting serious The world economy will grow by just 3% this year, according to the Centre for Economic & Business Research (CEBR) in its latest forecast at the end of August, down from last year's 4.2% rise and less than the think tank's previous forecast of 3.5%, made in May. World economic growth is now forecast to be sluggish until 2015. However, Douglas McWilliams, CEBR's chief executive points out, "The silver lining to this cloud is that the prices of oil and other commodities are likely to be relatively weak for the next five years, putting less downward pressure on living standards than in the past two years." (a) Recession history goes back a long way - to 1854 in fact - with 32 cycles in the US (averaging 17 months of contraction and 36 months of expansion). History and duration of recent recessions - 1929 to late 1930s, Great Depression, stock market crash, banking collapse in the United States sparks a global downturn. Durations: 43 months, 1937, second downturn of the Great Depression. Durations: 13 months, 1945, Duration: 8 months, 1948-1949, Duration: 11 months, 1953-1954, Post-Korean War Recession - The Recession of 1953 was a demand-driven recession due to poor government policies and high interest rates. Duration: 10 months, 1957-1958, Duration: 8 months, 1960-1961, Duration: 10 months, 1969-1970, Duration: 11 months, 1973-1975, Oil crisis, a quadrupling of oil prices by OPEC coupled with high government spending due to the Vietnam War leads to stagflation in the United States. Duration: 16 months, 1979-1980, 1979 energy crisis, the Iranian Revolution sharply increases the price of oil, 1981-1982, Duration: 16 months, 1982 and 1983, Early 1980s recession, caused by tight monetary policy in the U.S. to control inflation and sharp correction to overproduction of the previous decade which had been masked by inflation, 1980 to 2000, Great Commodities Depression - general recession in commodity prices, 1990 to 1992, Early 1990s recession - collapse of junk bonds and a credit crunch in the United States leads to one quarter of US GDP decline, and therefore not an official recession, 1990 to 2003, Japanese recession -collapse of a real estate bubble and more fundamental problems halts Japan’s once astronomical growth, 1997, Asian financial crisis - a collapse of the Thai currency inflicts damage on many of the economies of Asia, 2001 to 2003, Early 2000s recession - the collapse of the Dot Com Bubble, September 11th attacks and accounting scandals contribute to a relatively mild contraction in the North American economy. Since the US GDP never actually declined in this period it is not considered an official recession.

(b) IMF’s World Economic Outlook (April 2011) http://www.imf.org/external/pubs/ft/weo/2011/01/index.htm IMF’s World Economic Outlook (Update) (June 2011) http://www.imf.org/external/pubs/ft/weo/2011/update/02/index.htm Extract from IMF World Economic Outlook (Update) (June 2011) Activity is slowing down temporarily, and downside risks have increased again. The global expansion remains unbalanced. Growth in many advanced economies is still weak, considering the depth of the recession. In addition, the mild slowdown observed in the second quarter of 2011 is not reassuring. Growth in most emerging and developing economies continues to be strong. Overall, the global economy expanded at an annualized rate of 4.3 percent in the first quarter, and forecasts for 2011–12 are broadly unchanged, with offsetting changes across various economies. However, greater-than-anticipated weakness in U.S. activity and renewed financial volatility from concerns about the depth of fiscal challenges in the euro area periphery pose greater downside risks. Risks also draw from persistent fiscal and financial sector imbalances in many advanced economies, while signs of overheating are becoming increasingly apparent in many emerging and developing economies. Strong adjustments—credible and balanced fiscal consolidation and financial sector repair and reform in many advanced economies, and prompter macroeconomic policy tightening and demand rebalancing in many emerging and developing economies—are critical for securing growth and job creation over the medium term. (c) Asian confidence comes in part from a perception that debt fuelled western economies have been exposed and weakened by the financial crisis, and a realisation that this has created an opportunity to shake up the old order. Perhaps the time for Asia as a region to rise up has arrived. This view is certainly shared by Dominique Strauss-Kahn former MD of the IMF, who argues that Asia has emerged as an economic power house as a result of the banking meltdown.

Peak Oil – Saudi Returns to the Well June 2011 - Saudi Arabia's ability to defy other OPEC members and boost its oil output has been confirmed by the annual report of its state-owned producer. Earlier this month, Saudi Arabia was outvoted at an OPEC meeting in Vienna, where its bid to boost production quotas was blocked by Iran and other members. The Saudis were sympathetic to US and European pleas for more oil to bring down the high price holding back their economic recoveries, and wanted to boost production by 1.5 Mnbd. Since the meeting, speculation has been rife that Saudi Arabia may increase its oil production unilaterally, and the 2010 annual review of Saudi Aramco shows it certainly has the potential. Average daily production by Saudi Aramco, the second largest oil producer in the world, was 7.9 MnBbls, but the report indicates maximum capacity of 12 Mnbd. It stated: "The Company increased the pace of its kingdom-wide exploration programme in 2010 to prepare for future hydrocarbon demand.” "These efforts yielded success, with the discovery of four new oil fields, and one new gas field, increasing the total of Saudi Aramco discovered fields to 112, plus the addition to existing fields of six new oil reservoirs and three new gas reservoirs." These newly discovered onshore oil fields, Namlan, Qamran, Assayd and Arsan, compensated for 2010 production, maintaining the company’s total reserves at 260.1 MnBbls. Offshore, new seismic teams ventured into hitherto unexplored parts of both the Red Sea and the Arabian Gulf. The most potentially productive new field is Namlan, which produced 566 b/d in test drills, but this is a drop in the ocean compared to the expansion of existing fields. During the year, the company completed its biggest ever investment programme, boosting capacity at its Khurais and Khursaniya oil fields by 1.7 Mnbd. Khurais, commissioned in June 2009, reached sustainable capacity of 1.2 Mnbd last year. Furthermore, Saudi Aramco made good progress in developing the Manifa offshore oil field, soon to be the fifth largest in the world. The report states Manifa, where work started in November 2009, will be producing 500,000b/d by 2013, and 900,000b/d by 2014. With 84 new onshore wells, the company’s “Maintain Potential Programme” added a further 232,000b/d to long term capacity, and it launched an upgrade of its Safaniya offshore oil field, the world’s biggest. Saudi Aramco’s ability to process any extra oil it may produce in excess of OPEC quotas will be ensured through three planned 400,000 b/d refineries at Jubail, Yanbu and Jazan. To deliver their oil to eager customers all over the world, during 2010 the company invested in major pipelines and took delivery of four new VLCCS from Korean ship builder Daewoo, bringing their trading total to 14. The report proudly concludes: "Honouring our tradition as a reliable and stabilising force in world energy markets, Saudi Aramco maintained its globally essential spare oil capacity." See previous articles about peak oil in the Weber Monthly: ‘Peak Oil – Sweet not sour becomes the issue’ – Apr 2011 ‘Peak Oil – Environmental Cost of Oil Exploration Threatens New Cap for Oil Supply’ – Dec 2010 ‘Peak Oil – The Dead Debate – Spare Capacity and Data Transparency the Issues of the Day’ – May 2010 ‘Peak Oil – The Rise of Iraq Pushes Back the Peak Oil Curve” – February 2010 ‘Peak Oil – Here We Go Again – Oil Shortages by the End of the Year’ – Sept 2009 ‘Peak Oil – Underinvestment to Hasten the End of the Age of Oil’ – May 2009 ‘The End of Tyranny of Oil in Our Time’ – February 2009 | ‘Temporarily Off the Front Pages’ – October 2008 ‘Just OPEC left to Convince’ – June 2008 | ‘Oil Company Executives Going Green’ – March 2008 ‘Spare Supply Capacity Continues to Recover’ – June 2007 | ‘Plateau or Peak – the CERA proposition’ – March 2007

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What lies behind the OPEC split?

OPEC, whose 12 members produce about a third of the world’s oil, appears to be splitting into two camps, with implications that can only be guessed at. The cartel’s meeting on June 8 in Vienna was eagerly anticipated by consumers, who hoped quotas would be raised to ease the soaring price and help their faltering economies. Their optimism seemed well founded as US-sympathetic Saudi Arabia, largest producer and traditional OPEC leader, pressed for an overall increase of 1.5Mnbd to 30.3Mnbd. But storm clouds gathered in the build up to the meeting, as the two US bête-noirs, Venezuela and Iran, forged an alliance. The US managed to push the Venezuelans into the Iranian embrace on May 24, by hitting their state-owned producer PDVSA with sanctions for supplying gas to the theocratic regime. Unfortunately for the US, Iran has since January 1 held the Organisation's presidency, allowing it to dominate the agenda.

Iranian President Mahmoud Ahmadinejad’s ambition to chair the annual meeting in person sent US opinion into apoplexy. Joseph Petrowski, chief executive of Gulf Oil, told Newsmax: “It’s fabulously astonishing, despite the 12-person rotation in OPEC, that an organization that says they are committed to market stability chooses now as a leader to get on the soapbox who has called the Holocaust a myth, wants to wipe Israel off the map, and even questions the story on 9/11 - our own tragedy.” In the event, Mr Ahmadinejad did not chair the meeting, a move much more likely to have been motivated by Iran’s internal power battle than US opinion. But the Iranian view that the world was already well supplied with oil won the day, attracting support from Algeria, Angola, Ecuador and Iraq.

With Muammar Gaddafi’s forces under sustained NATO assault, it was predictable that Libya, whose oil minister defected to the rebels a week before the meeting, would side with Iran. As Nigerian delegates sat on their hands, Saudi Arabia was supported only by Kuwait, the United Arab Emirates, and Qatar, which is the most western-oriented friendly OPEC state, as demonstrated by a successful World Cup bid and support for the Libyan rebels. As was widely predicted after the meeting, Saudi Arabia, without making any announcement, has quietly increased production to nearly 10Mnbd from an average of 9.1Mnbd in February. Even before the meeting, OPEC members were, according to Wall Street Journal, exceeding their collective quota by 1.5Mnbd, and the Saudi boost raises further doubt over the relevance of the published production limits. According to a Monument Securities research note: “There was a time when rumours of the break-up of OPEC would have sent the oil price plummeting. But the realities of global supply and demand have been such that OPEC has lost control over the crude oil market."

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Marco Ostwald of Monument Securities declared OPEC "on the point of break-up" but Jason Schenker, president of Prestige Economics, told USA Today this was unlikely. He said: “I think there were some tensions. But everyone has to do business and countries have different views on what the future of demand looks like." With Iran firmly in the driving seat, a breakaway faction could only be led by Saudi Arabia, but it seems to be avoiding aggravating the dispute with controversial statements, and its allies are lukewarm. Before the Vienna meeting, Qatar's oil minister Mohammed al-Sada hardly issued a ringing call to arms for more production when he told reporters: “We think the fundamentals are fine - I don't expect OPEC to take a dramatic decision.”

If you believe OPEC secretary general Abdullah al-Badri, the tensions are all illusory, and geopolitical factors and the Sunni-Shia divide between Saudi Arabia and Iran, backers of opposing factions in Bahrain, should be ignored. He told Reuters news agency: “We are unhappy that we did not reach a decision but this is not the end of the world. It was not political - it was really an economic situation. "Of course, for the past six years we have enjoyed a very relaxed atmosphere, now we have some tension. I hope we will overcome it."

But Mr al-Badri is no more a disinterested observer than any of the other main players, as demonstrated by his speech on April 19 marking the Organisation’s 60th anniversary. He told his audience: “There is no shortage of oil anywhere in the world. Moreover, stock levels remain high, and OPEC's spare capacity is around 4.5 MnBd, even after the recent disruptions.” And Mr al-Badri, a citizen of Libya, ended his address with a ringing endorsement of his host the Islamic Republic of Iran. Paul Horsnell at Barclay Capital in London predicted in early August that the call on OPEC crude would be 1.3Mnbd higher in the second half of the year than it was in the first half. It seemed that OPEC would have to move on its stance that the world was well supplied with oil. However, August has proved a dramatic month and with demand forecasts being revised down as the world economy enters decidedly choppy forces, and with world oil supply possibly bolstered by the return of Libyan oil following the downfall of Gaddafi in late August (the rebels estimate that production will reach 1.2Mnbd within one year), it may be that the call on OPEC (ex Libya) crude oil supplies will not be as high as first thought. It is certain though that the 2H11 is going to be crucial both for the world economy and for OPEC’s relationship with the rest of the world.

Potential Drivers for Tanker Market in 4Q11/2012

Positive

Wild Cards Negative

Shipping Exit strategies in focus – With few single hulls left to scrap, and owners of older double hull units that have been written down still hanging on waiting for a wild card event that might bring a final pay day, scrapping has been relatively muted in 1H11. But with crude oil demand forecasts being revised down again at mid-year, scrapping has moved up the agenda. Layup too has been relatively limited with owners fearing damaging to their vetting status. However, if rates fail to improve in 2H11 then expect layup to be a more prominent feature. The FPSO conversion market continues to provide a safety value for upward tanker supply pressure - 25 of the 53 FPSOs on order are converted tankers with 9 of these lined up since March. There are around 200 new FPSO projects in the offing with most in Brazil, Nigeria and Angola. Slippage – Delivery delays will continue to have an important part to play in mitigating fleet supply growth. Slippage has becoming increasingly important to this sector rising from 18% in 2009 to 20% in 2010 and it may be that this phenomenon will peak in 2011. ‘Balance Sheet’ Recession – Low Appetite to Start Building – Shipowners remain focused on minimising debt rather than making new investments. Ordering had started to fall at the end of 2010, but during 1H11 reverted to the very depressed levels of 4Q08-2Q09. With earnings expected to remain low, total 2011 orders are likely to fall below the 10MnDwt ordered in 2009 and well below the figure of 32MnDwt ordered in 2010. Oil Industry Demand to Continue to Recover in 2011(4) – Despite a 0.1Mnbd downward revision in its 2011 forecast made in August (following a 0.2Mnbd downgrade in May), the IEA still expects oil demand to increase by 1.2Mnbd this year and by 1.6Mnbd in 2012. Global Stocks Low – Global crude oil stocks are lower than in 2010. Even so the IEA has shown a preparedness to release oil from the SPR (60MnBbls Jun 23) and despite the limited success of the strategy in halting the rise in oil prices, the IEA has indicated that it might repeat the exercise. World Oil Supply Holding Up – Despite the failure to reach an agreement on increasing quotas to compensate for lost Libyan output, OPEC production has regained pre-Libyan crisis levels thanks mainly to Saudi Arabia’s production surge. Spare capacity is estimated by the IEA at 3.3Mnbd, which is getting uncomfortably close to the danger level of 2.5Mnbd seen in 2008. However, weakening oil demand growth forecasts for 2011 mean this is not yet a headline issue. World Economy No double dip yet – In its latest WEO

Nature Hurricanes – After a quiet year in 2010 with no hurricanes making landfall on the US mainland, forecasts for the 2011 season predict higher than average activity with 17 names storms compared with an average of 9-12. (2009 was the slowest season since 1997 - 2008 was the worst US hurricane season since 2005 with Gustav (Aug 26) and then Ike (Sep 5) striking. http://www.nhc.noaa.gov/, and http://hurricane.atmos.colostate.edu/. Hurricane season June-November. Global Warming – According to the UN World Meteorological Organization (WMO), 2010 ranked as the warmest on record - together with 2005 and 1998. In 2010, the global average temperature was 0.53 degrees Celsius (0.95 degrees Fahrenheit) above the mean for the period from 1961 to 1990, the reference period for the Geneva-based WMO. In addition, Arctic sea-ice cover in Dec 2010 was the lowest on record, with an average monthly extent of 12MnKm2, 1.35 MnKm2 below the 1979-2000 average for http://www.metoffice.gov.uk/climate/uk/2009/ http://www.metoffice.gov.uk/weather/world/seasonal/

Geopolitical Hotspots Syria – Syrian death toll passes 2,000 in early August. President Bashar al-Assad defies global pressure including increasing condemnation from Arab neighbours as his forces continue attacks on protesters Libya – Libyan crisis look intractable although military pressure is being maintained. Even the best case scenario indicates Libyan oil is many months away from returning to full capacity. Israel/Egypt – In early September, the Israel embassy in Egypt was stormed by protestors railing against Israel following the death of several Egyptian border police, and against the pace of change being delivered by the interim Egyptian military government. This raises the instability risk within Egypt and the threat to Israel, which has already seen a freeze in its relations with Turkey. Israel/Palestine – Both sides have acknowledged President Obama September 2011 deadline for peace talks but with agreement looking unlikely Palestinians looking to be recognised as an independent state by the UN even though US likely to veto. Nigeria – An islamist uprising in Borno was brutally repressed in July. Tensions now at least temporarily subsided with most international attention focused on massive oil pollution problems caused by repeated spills. Simmering Disputes –These include the rising tension between China/Japan over rights to the South China Sea – Iran’s standoff with the international community over its nuclear ambitions - North Korea’s standoff with the world community over its nuclear ambitions – Venezuela/US tension – Russia’s

Shipping Supply Growth of 6%pa in 2011 – Deliveries will exceed 50MnDwt in 2011 unless scrapping really starts to take off. This compares with 2009 and 2010 when deliveries hit 48MnDwt and 42MnDwt respectively, and annual average deliveries 2004-2008 of 30MnDwt. Deliveries are set to moderate somewhat in 2012 to below 40MnDwt, although fleet growth is still expected exceed 5%. ‘Balance Sheet’ Recession – Debt Burden – Another poor set of results in 2Q11 means that most owners have been running negative profits for at least four quarters, and remain focused on paying down debt rather than maximising profit. Owners continue to raise additional funds, in part to pay down debt, through issuing extra shares (Scorpio May 19) or drafting in private equity capital. The process of renegotiating breach threatened debt covenants goes on as asset values once again start to fall after rallying weakly in 2010. The raised threat of a double dip recession means that the prospect of consolidation in the industry is higher than at any time since the onset of the Great Recession. On Jul 8, Omega Navigation filed for chapter 11. Floating Storage – Rising oil prices has hit the viability of this trade. There are just a handful of VLCCs now in storage compared with 16-18 in April and 39 VLCCs in mid 2010. Oil Industry OECD Demand once again the Weak Link – IEA is still predicting a modest increase in OECD oil demand in 2011 and 2012, but noted in its August report that, “A lower GDP case would cut 0.3Mnbd and 1.3Mnbd respectively from 2011 and 2012 demand”. Oil Prices at Unsustainable Levels(1) –Oil prices surged much faster than expected during 1H11. Despite price falls in August and even though oil supply is holding up, the risk factors swirling around oil supply mean that higher prices will return unless the world economy enters a double dip, which could make the recovery from the Great Recession even slower and more difficult than expected. World Economy “On track” recovery takes wrong turning – Poor leadership by Western governments triggered a mid-summer stock market slump. Unless EU leaders resolve rather than fudge the regions sovereign debt crisis, and unless the US can convince the market that indulgent internal squabbling was a temporary illogical blip, then a double dip recession - considered unlikely at the start of July – will take hold G20 losses momentum – The cooperation between governments - symbolised by the rise of the G20 - was considered in part responsible for averting

(Apr 11), the IMF asserted that the global recovery was largely following the predicted path which meant that it had left its forecasts virtually unchanged from Jan 11 with global GDP expected to rise by 4.5% in 2011 and 2012 down modestly from 5% in 2010. The WEO doesn’t report again until October but it may well be that forecasts are downgraded. China’s Soft Landing Less Assured – After a solid 2Q11 performance, China’s projected GDP growth remained virtually unchanged at 9.6%. However, there are increasing concerns within the country about inflation, and there are signs that the troubled domestic financial system is starting to resemble a ticking bomb.

attempts to modernise its oil transportation system to create the ability to switch oil supplies from east to west – a flexibility which some believe it may attempt to use as an economic weapon in the future.

a Depression in 2008. Today the accord has dissipated as shown by China’s decision to lecture the US over the loss of its triple-A debt rating in August.

Notes supporting table above outlining potential drivers for the market in 2011

See appendices (A) at the end of the report for additional information outlining potential drivers for the market

(1) Oil Price forecasts – In its August 2011, Short Term Energy Outlook, the EIA forecast that WTI oil prices will average USD95.71Bbl in 2011 up from USD79.40Bbl in 2010. However, the EIA forecast tends – like most forecasts follow current trends as well as altered reality. Its forecasts for 2012 average prices have changed dramatically from USD95.5Bbl in January to USD113.8Bbl in April to USD101Bbl in July. Goldman Sachs Group Inc. have revised up their end of year forecast for WTI (three month price) to USD85Bbl from USD72Bbl based on their expectation of tight crude oil supplies. They also anticipate spikes above USD90Bbl.

(2) Crude oil start-ups – what is the new required oil price – Oil companies are being forced to develop oil fields in increasing hostile regions (e.g. deep water projects in the Atlantic and USGulf), and this has driven up the required oil price for project sustainability. The required oil price level for new projects varies enormously depending on exactly how difficult the oil is to extract. June 16, 2011 – According to Adam Sieminski of Deutsche Bank, “Break-even oil prices to balance budgets in key oil-exporting countries range from USD82/bbl in Saudi Arabia to USD96/bbl in Russia and USD103/bbl in Nigeria. We believe this lends support to crude prices alongside rising finding and development costs.”

(3) Deep-sea areas will be the main source of new oil discoveries – Despite the major deep water US Gulf spill (BP Deepwater Horizon) some think that now the well has been capped this incident will register merely as a blip in the history of oil exploration. West Africa and Offshore Brazil have reported major finds in the last few years and are expected to be two of the primary locations for future major oil discoveries. Iraq is the major hope for onshore discoveries with recent sales of oil blocks to international oil companies opening up the prospect that Iraqi production could hit 12Mnb.

(4) 2011 Demand Forecast – IEA’s August Crude Oil Demand Growth Estimates for 2009 -1.3% (-1.1Mnbd, 85Mnbd), 2010 +3.4% (+2.9Mnbd, 87.9Mnbd), 2011 +1.4% (+1.2Mnbd, 89.5Mnbd), 2012 +1.8% (+1.6Mnbd, 91.1Mnbd) compares with the August forecasts from the US EIA 2009 -1.4MnBd, 2010 +2.0Mnbd, 2011 + 1.4Mnbd, 2012 +1.6Mnbd, OPEC 2009 -1.5Mnbd, 2010 +2.0Mnbd, 2011 +1.2Mnbd, 2012 +1.3Mnbd.

(5) IMF Real GDP forecasts

Apr11 09 10 e11 e12 World -0.5 5.0 4.4 4.5 China 9.2 10.3 9.6 9.5 India 6.8 10.4 8.2 7.8 USA -2.6 2.8 2.8 2.9

Euro Area -4.1 1.7 1.6 1.8 Japan -6.3 3.9 1.4 2.1

Middle East & Africa 1.8 3.8 4.1 4.2 Oct10 08 09 e10 e11 Apr10 08 09 e10 e11

World 2.8 -0.6 4.8 4.2 3.0 -0.6 4.2 4.3 China 9.6 9.1 10.5 9.6 9.6 8.7 10.0 9.9 India 6.4 5.7 9.7 8.4 7.3 5.7 8.8 8.4 USA 0.0 -2.6 2.6 2.3 0.4 -2.4 3.1 2.6

Euro Area 0.5 -4.1 1.7 1.5 0.6 -4.1 1.0 1.5 Japan -1.2 -5.2 2.8 1.5 2.3 -0.7 -5.4 1.7

Middle East & Africa 5.0 2.0 4.1 5.1 6.2 5.4 2.0 4.2 Oct09 07 08 e09 e10 Apr09 07 08 e09 e10

World 5.2 3.2 -1.0 3.0 5.2 3.2 -1.3 1.9 China 13 9.0 8.5 9.0 13 9.0 6,5 7.5 India 9.4 7.3 5.4 6.4 9.3 7.3 4.5 5.6 USA 2.1 0.4 -2.7 1.5 2.0 1.1 -2.8 0.0

Euro Area 2.7 0.7 -4.2 0.3 2.7 0.9 -4.2 -0.4 Japan 2.3 -0.7 -5.4 1.7 2.4 -0.6 -6.2 0.5

Middle East & Africa 6.2 5.4 2.0 4.2 6.3 5.9 2.5 3.5 Oct08 06 07 e08 e09

World 5.1 5.0 3.9 3.0 China 11.6 11.9 9.7 9.3 India 9.8 9.3 7.9 6.9 USA 2.8 2.6 1.6 0.1

Euro Area 2.8 2.6 1.3 0.2 Japan 2.4 2.1 0.7 0.5

Middle East & Africa 5.7 5.9 6.4 5.9

China: Inflation - The cloud that signals a new weather system This section provides an insight to some of the key recent developments in the seemingly unstoppable rise of China as an economic super power.

Sep 12 – Beware shadow banking crack down - China’s belated realisation of the dangers posed by its unofficial banking sector presents risks to the whole national economy, leading commentator James Kynge has warned. In the Financial Times China Confidential report editor James Kynge writes that the esoteric nature of new rules imposed by the People’s Bank of China obscures the importance of the issue. He lists three risks of the new rules (1) shadow banks may go bust, (2) they may raise interest rates to unaffordable levels, and (3) their official counterparts will lose an important part of their income. As the central bank has imposed ever tighter restrictions on lending over the last year in its battle against inflation, Chinese banks have responded with ingenuous ruses to keep loans off balance sheets. One of the most important of these is lending on condition debtors provide a proportion of their loans – often as high as 50% - to be held by the bank as “margin deposits.” Many banks hold huge sums in margin deposits, which now make up a very high proportion of their overall assets. Accordingly, fees elating to margin deposits have become a very important part of the income of most banks. The crackdown on margin deposits is being phased in over six months, showing the authorities’ awareness of its potential for damage and disruption. But Mr Kynge warns that the greatest impact will be suffered by minor banks, whose support is crucial to small businesses and local entrepreneurs. He concludes: “We think Beijing may adopt fresh policies to ease the pressure on small banks and small and medium sized enterprises. “What are not expected to change, though, are official attempts to rein in the shadow banking system.” Sep 8 – China’s leadership battle highlights problem of corruption - China’s Communist Party may be about to split into two camps wrestling for supremacy in the run up to a crucial political shake-up next year. At the 18th Congress of the Communist Party, to be held in the Great Hall of the People, Beijing, in about a year, successors to Paramount Leader Hu Jintao and President Wen Jiabao will emerge, along with an entirely new Politburo Standing Committee (cabinet) of about eight members. Most commentators expect the anointed pair to be Xi Jinping (currently vice – president) and Li Keqiang (deputy party secretary). Of rather more general interest than their names is the direction they may wish to take the nation which, while the once venerated books of Karl Marx gather ever more dust on book shelves throughout the world, still calls itself a People’s Republic. According to the Financial Times’ latest China Confidential report, two schools of thought are emerging, known as the Guangdong and Chonqing models because they are espoused by the party bosses of these two provinces. The partisans of both models, according to editor, James Kynge are acutely aware that China’s main challenge in the years ahead is widespread corruption by officials and party functionaries. The Guangdong Model, which English speakers would describe as more liberal, favours closer supervision of officials by regional bodies and forcibly restoring vision to their apparently blind eyes. The traditionalist Chonqing Model, on the other hand believes the problem is best confronted by granting more powers and political support to the police, and stressing the ideology and words of Mao Tse Tung. In public, Chinese politicians very rarely unambiguously support any clear line or policy, and are reluctant to betray where their allegiances may lie.

Pulse Series

Mr Kynge writes that the main significance of a recent policy forum near Beijing was its acceptance that the two models exist and are distinct. But the recent visit of US president Joe Biden shone a rare spotlight on XI Jinping, who is likely to emerge as China’s most powerful figure. He impressed Mr Biden and his aids, but his public remarks appeared to be inspired by a fundamental distrust of the USA, and reluctance to drop his guard. Mr Kynge believes he is veering to the traditionalist Chonqing Model, and believes he can detect the inheritance of Xi Jinping’s father, who was a revolutionary. Many top party figures with a family history in the Chinese Communist Party’s long battle for power are traditionalist, and are coalescing into a faction known as “The Princelings”. Xi Jiping is gathering support from several key figures in the military who also come from Princeling backgrounds. But according to Mr Kynge, Xi Jiping also has family connections and regional affiliations in the other camp, and a traditionalist triumph next autumn is far from inevitable. He writes: “The models are not mutually exclusive, and the next leadership may end up adopting, or testing, elements of both.” Aug 8 – China’s battle with inflation getting serious - Stock markets are tumbling around the world including in China in response to S&P’s decision to downgrade US debt from triple-A to AA-plus. The stock market drop brought into sharp relief China’s continuing battle with inflation. The FT China Confidential (CC) notes that its survey of 600 urban middle class in late July, 73.5% complained that their cost of living had increased from a year earlier with the mean increase of 17.8%, the highest recording since CC started tracking the data point in April. It also notes there are increasing signs of near defaults among local government financing vehicles. The situation has heightened concerns over the state of the domestic financial system which FTCC has previously described as a ticking bomb. Jul 29 – Public outrage after high speed rail disaster Jul 27 - Chinese Number Two at IMF Jun 10 – Power shortages to worsen - Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, “Even without power issues, China's diesel balance would have been the focus of regional market attention given its dominant role. Based on the measures we employed, incremental diesel demand due to the power shortfall could be 200,000-225,000 b/d. Though power shortages are likely to worsen in 2012-13, sizable refining capacity additions should help loosen China's diesel balance.” Jun 9 - China surpassed the US to become the world’s largest energy consumer in 2010, as the rebounding global economy drove worldwide consumption higher and at a rate not seen since the aftermath of the 1973 oil-price shocks, according to the latest annual BP Statistical Review of World Energy.

Tanker Market Outlook for 4Q11/2012 The headline news for world oil demand is not at all positive for the oil tanker sectors with the OECD announcing in early September that it expects G7 (excluding Japan) growth to register less than 1% in 2H11. OPEC followed up shortly thereafter with 150Kbd and 40Kbd downward revisions in its 2011 and 2012 crude oil demand forecasts respectively. This downgrade was reinforced when the International Energy Agency also cut its forecast (published September 13) even more severely by 200Kbd and 400Kbd respectively for 2011 and 2012. However, looking behind the headlines it is not all doom and gloom. OPEC demand growth forecasts remain positive for 2011 (+1.1Mnbd, +1.2%) and 2012 (+1.3Mnbd, +1.4%) respectively, and the situation is nowhere near as bad as in 2008-9 when demand contracted by 0.7% and 1.3% in successive years (according to the IEA). The real problem for tanker shipping – assuming there are no further downward revisions in demand – remains its own intractable supply-side issues. The overall tanker orderbook (based on vessels >=10,000Dwt) is still equivalent to around 20% of the trading fleet and fleet growth is forecast to hit 7% in 2011. The weakness of spot market earnings are testimony to the fact that the tonmile demand accelerator created by the disproportionate growth in long haul trades such as Middle East to China is not yet sufficient to overcome this level of fleet growth. Looking into 2012 and beyond the supply-side pressure will moderate with 38MnDwt and 21MnDwt currently scheduled for delivery in 2012 and 2013 respectively compared with more than 52MnDwt in 2011 (42MnDwt in 2010). Aframax size vessels and smaller are expected to grow significantly slower than the Suezmax and VLCC classes. The question for tanker owners – assuming crude oil demand growth does not soften further - is whether the slowdown in fleet growth will come quickly enough to ease the pressure on earnings. Consequently, the market is focused on factors that might reduce supply in the short term. Scrapping, slippage, layup, storage, conversions and slow steaming are some of the elements that may act to moderate fleet growth. There is around 50MnDwt in the 15+ age bracket and these vessels would typically be thought of as the first candidates for scrapping, although if the market gets really bad for a prolonged time and buyers even for distressed sales are absent then more modern tonnage including newbuildings could potentially be at risk. As discussed in section 2.1, the decision to layup vessels, which in some other shipping sectors is a viable intermediate term option, remains generally out of the question for tanker owners over fears of loss of vetting status. However, Frontline’s announcement in August that it would be laying up some of its VLCCs opens up the possibility that layup will become much more important during 2H11. New deliveries are the most obvious candidates for short term or soft layup as they have yet to acquire approvals. The FPSO conversion market continues to be buoyant with 6 sales reported since March and remains a possible route to exit the market. Of the 53 FPSO’s on order 25 are converted tankers.

(a) Background 2010 – Average tanker earnings (USD24,000pd) though still very poor were actually up slightly on 2009 levels, but this achievement masked serious supply side problems. It had been expected that supply would be stable in 2010 as a result of the legislated demise of the single hull fleet. However, many of these vessels had long since left the international trading fleet and the scrapping surge did not materialise. Earnings were actually reasonably strong during 1H10 but despite a strong recovery in crude oil demand in 2010 (up 2.4Mnbd, +2.8%), newbuilding deliveries overwhelmed the market driving rates down to very low levels during the summer. There was a modest recovery in rates at the tail end of the year driven in part by extreme cold weather along the US Eastern Seaboard and in Northern Europe.

Background 2009 – With the global economy fighting the Great Recession, the tanker sector was unable to fend off its own rate collapse for long with rates fairly consistently depressed throughout 2009 as a result of a lethal combination of demand contraction (down 1.1Mnbd, -1.3% yoy), and an acceleration in fleet supply growth (+7.2%). Average tanker earnings (across all sectors) dropped precipitously from around USD62,000pd in 2008 to USD22,000pd in 2009.

Background 2008 - Despite the onset of global recession, average 2008 tanker earnings (USD62,000pd) were on par with record 2004 levels and even held up reasonably well during the latter part of 2008. This respectable performance was the result of reasonably solid supply/demand fundamentals. Despite

running out of steam towards the end of the year, average global crude oil demand (86.1Mnbd) was down just 0.7%yoy, while fleet growth of 6%, although high, was close to the five year (’04-08) average of 5.5%. At this point the sector had been able to avoid the catastrophic rate collapse that overtook the dry bulk market, which was engulfed towards the end of the year by a sudden aversion to counter party risk that caused a temporary dislocation in trade.

Slippage Update

Slippage Rates are sector dependent – The two charts below compare the slippage rates by size range for the tanker and dry bulk sectors. This comparison reveals that with the exception of the Suezmax fleet in 2008, slippage rates across different size ranges have moved similarly within sectors. It also shows that slippage was a very significant factor in the dry bulk sector in 2009 and 2010, reaching a peak of around 40% in 2009 before easing back to around 30% in 2010. By contrast, tanker slippage may have yet to peak reaching a high of around 20% in 2010.

Forecasting the Deliveries in 2011 for the VLCC Sector – The initial low case forecast for VLCC deliveries in 2011 is 71 compared with 59 deliveries in 2010. The delivery schedule is end loaded. This forecast is based on slippage rates of 20%. So far average slippage has been in line with projections although the pattern of deliveries is more front loaded than forecast.

0

2

4

6

8

10

12

14

1/08 1/09 1/10 1/11

VLCC Deliveries Historical and Forecast ‐ 2008‐2011  ‐As at July 2011

Actual  Deliveries F'cast Deliveries ‐ High F'cast Deliveries ‐ Low

2008 = 40 Deliveries 2009 = 53 Deliveries 2010= 59Deliveries 2011 Low = 71Deliv

2011 High= 72 Deliv

Definition of Slippage - Orderbook slippage occurs when earnings deteriorate and owners look to delay their orders to avoid the worst of the market. This happened in each of the last three years. In 2008, deliveries were down 11% on their projected level at the start of the year as the recession started to bite; while in 2009 and 2010 deliveries were down 17% and 19% respectively as earnings remained relatively low. Of course, there is also the phenomenon of positive slippage with owners accelerating their deliveries to try and catch a freight market wave. This feature was an important factor for the dry bulk market in the boom year of 2007 when both Handysize (+24%) and Capesize (+30%) deliveries accelerated, but this seemed to be partly at the expense of other dry bulk sectors.

Briefing Series

Calendar of Events 2011/12

Autumn

October IMF’s semi annual World

Economic Outlook 50 years since Cuban

missile crisis ended (28) Russia to join

Association of Southeast Asian Nations (ASEAN) (30) Resumption of

Berlesconi trial (3)

November IMF releases financial

stability report (Nov 3) 6th G20 summit held

Cannes, France (3-4) The Atlantic

hurricane season ends (Nov 30) Egyptian elections

December 2nd World Climate

Summit Durban (3-4) Russian legislative

elections OPEC 160th Ordinary

Meeting (Vienna Dec 14) Russia wants entry

into WTO by end 2011

Winter

January 2012 OECD semi annual world

economic review Denmark takes over the

EU presidency (Jan 1) USA takes over G8

presidency from France World Economic Forum,

Davos, Switzerland

February Chinese celebrate

the Year of the Water Dragon 14 Years since

Osama bin Laden issued a fatwa against all Jews and Crusaders

March The 34th League of

Arab States summit CMA- Shipping 2010 IMO MEPC 63 Russian Presidential

elections (Mar 4) IMO MEPC 63

Spring

April St George’s Day (23) 4th BRICS meeting,

India IMF’s semi annual World

Economic Outlook 50 Years since man

landed on the moon (20) French Presidential

elections (Apr 22)

May 11th Arab Energy

Conference 38th G8 summit held

Chicago, USA NATO meeting (25) First Anniversary of

the killing of Bin Laden May 1)

June The Atlantic

hurricane season starts (June 1) OPEC 161st Ordinary

Meeting UN Conference on

Sustainable Development (Rio, 4-6)

Summer

July OECD semi annual world

economic review Cyprus takes over the

EU presidency (Jul 1) IEA releases 2013

demand forecast. OPEC releases long range forecast

August Olympics take place

in London World Humanitarian

Day

September World Bank & IMF

meet Washington DC World Maritime Day

(Sep 27) 18th China National

Congress held autumn 20112

Future Vision In this section, possible events that will impact the tanker shipping and crude oil markets in the medium to long term are reviewed. Shipping K Line's LNG powered Car Carrier – Shipping line Kawasaki Kisen Kaisha Ltd. (K-Lines), Japan is developing, together with engine builder Kawasaki Heavy Industries Ltd (KHI) and Norwegian classification society DNV, a car carrier to be powered by Liquid Natural Gas (LNG). According to K-Line, switching from bunker fuel to LNG, CO2 emissions can be reduced by approximately 40%, NOx by 80 to 90% and both SOx and PM eliminated.

IMO introduces its watered down environmental measures - Mandatory measures to reduce emissions of greenhouse gases (GHGs) from international shipping were adopted by Parties to MARPOL Annex VI represented in the Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO), when it met for its 62nd session from 11 to 15 July 2011 at IMO Headquarters in London, representing the first ever mandatory global greenhouse gas reduction regime for an international industry sector. The amendments to MARPOL Annex VI Regulations for the prevention of air pollution from ships, add a new chapter 4 to Annex VI on Regulations on energy efficiency for ships to make mandatory the Energy Efficiency Design Index (EEDI), for new ships, and the Ship Energy Efficiency Management Plan (SEEMP) for all ships. Other amendments to Annex VI add new definitions and the requirements for survey and certification, including the format for the International Energy Efficiency Certificate. The regulations apply to all ships of 400 gross tonnage and above and are expected to enter into force on 1 January 2013. However, under regulation 19, the Administration may waive the requirement for new ships of 400 gross tonnage and above from complying with the EEDI requirements. This waiver may not be applied to ships above 400 gross tonnage for which the building contract is placed four years after the entry into force date of chapter 4; the keel of which is laid or which is at a similar stage of construction four years and six months after the entry into force; the delivery of which is after six years and six months after the entry into force; or in cases of the major conversion of a new or existing ship, four years after the entry into force date. The EEDI is a non-prescriptive, performance-based mechanism that leaves the choice of technologies to use in a specific ship design to the industry. As long as the required energy-efficiency level is attained, ship designers and builders would be free to use the most cost-efficient solutions for the ship to comply with the regulations. (see annex 10 for the full transcript relating to the 62nd session of MEPC)

Oil Industry (and alternative energy replacements) Source C.R. Weber, Oil & Gas Journal, IEA Publications

Long Term World Oil Demand Forecast

ExxonMobil Forecasts Global energy demand to rise 35% through 2030 – In its latest long range forecast (published January 2011), ExxonMobil forecasts that overall energy demand will rise by 35% by 2030, which is unchanged on its 2010 forecast, with it argues a shift towards gas as businesses and governments look for reliable, affordable, and cleaner ways to meet energy needs BP publishes World Energy Outlook 2030 (pub 19.1.2011) - its first attempt to forecast after many years of producing the industry standard historical energy review each year. In this first edition BP supports ExxonMobil’s glowing report for gas. In its assessment of the fuel mix changes over time, it reports that crude oil, excluding biofuels, will grow relatively slowly at 0.6% per year; natural gas will be the fastest growing fossil fuel with more than three times the projected growth rate of oil at 2.1% per year. Coal will increase by 1.2% per year and by 2030 it is likely to provide virtually as much energy as oil excluding biofuels. The strong carbon policy drive in OECD countries risks being more than offset by growth in emerging economies. Apr 28 - Strong growth in shale gas production, increasing use of natural gas and renewable energy sources in electric power generation, and declining reliance on imported liquid fuels are some of the findings in the latest energy outlook from the US Energy Information Administration.

Long Term World Oil Supply Forecast Significant new oil discoveries – 2011 has been a good year so far for oil discoveries. In August, Statoil reported that the Aldous and Avaldsnes oil discoveries are part of a single structure making it one of the ten largest ever discovered in the Norwegian sector and the largest since the mid-1980s. The structure is estimated to contain between 0.5-1.2MnBbls. Also in August, Rockhopper Exploration reported that the Sea Lion main complex in the North Falkland basin could yield ultimate recovery of 325-434MnBls. In June, BG Group said its presalt holdings in the Santos basin off Brazil contained a net potential of 6BnBoe, double the group’s early 2010 best estimate. The company estimated a 90% chance that its interests contain at least 4BnBoe and a 10% chance they could hold as much as 8BnBoe net. Also in June, Exxon announced that the Julia oil field, about 250 miles southwest of New Orleans, may hold more than 700MnBoe. EIA cancels 2011 US reserves compilation as it cuts budget – May 2 - The US Energy Information Administration reported that it will not prepare or publish US oil and gas reserves data for 2011 as it cuts USD15.2Mn from its budget. Mexico could become oil importer by 2020 - Apr 29 - Without sufficient investments in oil field development and the use of new, advanced technologies, Mexico faces becoming a net oil importer in 10 years, according to research by Rice University's James A. Baker III Institute for Public Policy and Oxford University. Mexico’s oil production peaked at about 3.9Mnbd in 2004. Since 2005, output has fallen by more than 25% to 2.98Mnbd in 2010. Mexico faces not only falling production but also rising demand. Demand for oil in Mexico has grown to 2.15Mnbd in 2010 from 500,000 b/d in 1971, with some variability in between reflecting changing economic conditions. Currently Mexico is a net oil exporter, with total net exports in 2009 averaging nearly 1Mnbd. If Pemex is able to maintain production levels through new finds and better efficiency, it can postpone an export crisis for 3 decades. But even with a longer timeframe, it is not assured that Mexico will undertake an orderly adjustment. Instead, it can generate incentives to postpone it or adjust to the decline in government revenues through the least-costly short-run solution, such as cutting public investment, which might also generate the greatest adverse effects in the long run.

Nuclear Power still the energy of the future for China

Following the Fukushima nuclear accident, there was a backlash against nuclear power. Countries recoiling from a nuclear future included Germany, which announced in May the closure of all 17 of its nuclear power plants by 2022. However, according to China Nuclear Energy Association, despite the Fukushima nuclear accident, the overall goal of China's nuclear power development should not be affected. During the Twelfth Five-year Plan period, China's nuclear power capacity under construction will reach 38Mn kilowatts, and a total of a 70Mn kilowatt capacity is expected to complete by 2020. By the end of 2015, the annual nuclear energy production will be not less than 320 Bn kilowatt-hours. Over the next five years, the nuclear power industry will receive

approximately RMB 70 Bn investment in fixed assets per year. China plans to host the 3rd Annual China Nuclear Power Leadership Summit on October 27-29 in Zhuhai City, Guangdong Province.

Environmental Hurdles Cost of Going Green - Jun 10 - One of the largest US electric utilities projects a minimum capital investment of USD6-8 billion by 2020 to comply with proposed US Environmental Protection Agency regulations that would affect coal-fired power plants.

Japan’s Globalisation Imperative

“Reimagining Japan” – a book published by McKinsey & Co in 2011 – starts with the premise that Japan is in decline and that forecasts of a 50% population drop off from current levels of 127Mn before the end the century mean this decline will continue. It gathers together essays from a diverse group of 80 contributors designed to explore how Japan might change its future direction. The book was conceived before the Japanese earthquake in March 2011, but amended to take account of the catastrophe.

The book provides evidence of why Japan needs to change, examples of change that is already taking place (e.g. a process of “creative destruction” is identified as taking place in politics – a process that it is hoped might reinvigorate the moribund institution), and how powerful this change could be in altering Japan’s fortunes – but perhaps the central question is, if profound change is to come, what will be the true drivers of that change.

After the Japanese earthquake in March a lot was said about the resilience of the Japanese people in the face of adversity – and how the quiet dignity of the victims of the catastrophe caused the world to renew its view of Japan and in so doing engendered a new sympathy for the country.

Many argued that the terrible events and the immense rebuilding that was required in the aftermath might prove a catalyst

to reinvigorating a Japan still regarded around the world after its lost decade in the 1990s as the sick man at the top table with a shrinking population and a stagnant economy.

Some commentators went as far as to say that the earthquake meant Japan had no choice but to change because (1) it could no longer be regarded as a safe haven (with both nuclear and geological fault lines), and (2) the failure of the political leadership to deal effectively with the crisis would force a changing of the old guard. They argued that the attitude observed by Yoichi Funabashi that some Japanese had settled for a period of graceful decline was no longer tenable – if it ever was.

Change certainly seems to be in the air – but the real imperatives for reimaging Japan are factors present before the earthquake. The shrinking population has dominated discussion about Japan for a number of years. The concern has been that the young will face an intolerable burden trying to support its ageing population, but another very real concern is that Japan’s world leading companies such as Sony and Toyota, which have built their strength on domination of their domestic market, will start to lose world market share and become smaller a smaller fish in a bigger and bigger global pond. This awareness may instil in Japanese companies an urgency to embrace globalisation, and this may become the strongest driver of change. When your strengths are no longer your strengths then it is time to change.

Gordon Orr, chairman of McKinsey Asia stresses the globalisation imperative, “Survival for many Japanese companies may depend on their ability to greatly increase overseas revenues and profits, given demographic and economic trends that suggest slower or stagnant growth in the home market. Even Japanese companies with established global business ….. must rejuvenate their overseas business models.”

Briefing Series

Shiseido – a cosmetics company – has successfully embraced globalisation. Chairman, Shinzo Maeda identifies a number of factors to explain Shiseido’s success in overseas market. These include (1) incorporating women and foreigners on the board of directors, and (2) developing a vision that it has been able to communicate to its workforce - “to be true to our Japanese origins and global responsibilities while also being seen as part of Asia”.

Gordon Orr points out that Japan’s sleeping giants are beginning to wake up. “There’s an uptick in international mergers and acquisitions, a new sense of urgency in boardroom discussions, and a few bold moves by Japan’s more progressive companies to use English as a global corporate language and to recruit talented non-Japanese executives. Still, as with most awakenings, the pace is slow and the approach often opportunistic and confused rather than strategic”.

Even if one accepts that globalisation is the imperative and, therefore, the catalyst for change, there are a number of failings/weaknesses which need addressing along the road. Many of Japan’s failing/weaknesses are well documented e.g. untenable zombie companies created by Japan’s socialist slant on capitalism – over emphasis on efficiency at the expense of innovation - ineffectual political leadership demonstrated by the rapid turnover at the top (In August, Yoshihiko Noda became Japan's seventh prime minister in six years) – disillusioned woman excluded from workplace and rejecting motherhood – the potential burden of an ageing population – a generation of young people that have disengaged with the world beyond Japan’s shores.

The last item in the list above points to what may be one of the biggest obstacles to change – in the direction of globalisation at least – that is Japan’s predilection for looking inward. Japan has a history of seeking isolation. For more than 200 hundred years, it declared itself a “locked country” – where no one was allowed in or out. This policy was only ended under duress from outside forces in the mid 19th century.

Even during its most successful period of international engagement from the 1960s to the 1980s, Japan’s idea of internationalisation according to Glen S. Fukushima, was to, “Export people, manufactured goods and capital, rather than to import any of these commodities into Japan”.

At the start of the lost decade in the 1990s, Fukushima argues that, “Japan has shown a marked tendency to turn complacently inward”. The example of declining numbers of students studying abroad is often cited as an example of this process. In a survey of Japanese in their 20s conducted in 2009 and looking at reasons for not going abroad, 27% expressed no interest in foreign things (2nd most important reason), while 24% reported concerns about danger (4th).

There is a plan to raise the number of students studying abroad from 66833 in 2008, to 300,000 by 2020. However, there are as yet no structures to make this happen.

Apart from squaring globalisation with Japan’s tendency toward insularity, another prerequisite for change is the ability to develop a shared definition of what kind of society is waiting at the end of the journey. After many years of population growth, Japan has become acutely aware of the fallacy of growth. Indeed some, like Mark Clifford, and Natsumi Iwasaki, argue that Japan is confronting problems that will confront the rest of the developing world in the future.

Japan could have a pivotal role to play in the development of Asia. It remains to be seen whether Japan is prepared to take follow this destiny or whether it will indeed settle for gradual decline.

Listed Tanker Companies

There was a gradual decline in tanker shares that gathered pace during 2Q11 before entering a steep slide in August as stock markets around the world corrected sharply downward in response to a dawning realisation that a double dip recession might be just around the corner. Serious over supply issues continue to act as a consistent drag on the performance of the sector, although at least some industry participants are starting to suggest that orderbooks are starting to become less problematic for certain vessel sizes – notably Aframax and Handysize where values for the orderbook as a percentage of the trading fleet are down to 12% and 10% respectively. The prospect of improved supply conditions is less imminent for VLCC and Suezmax where the corresponding figures are 25% and 28% respectively. In late August, the official website of the Nasdaq started to talk up a rebound in tanker shares after analysing how hedge funds are investing in it. It argues that with rates at rock bottom, short-term pessimism may have pushed shipping stocks below their true value, perhaps creating opportunities for investors. Billionaire investor Wilbur Ross told the Financial Times: “The history of the industry is one that goes from immense prosperity to immense poverty and back again, and we think that’s going to continue. “We’re not necessarily at the exact bottom of the cycle, but we think we

are relatively close to it.” There are some tangible signs of increased interest in the sector. Scorpio Tankers and Global Ship Lease are currently popular with institutional investors who have bought 54% and 16% of their overall value in the last quarter – while Diamond S. Shipping, which is backed by investment company First Reserve, announced in early August that it had entered into a definitive agreement to acquire 30 medium-range refined product carriers to add to its fleet of ten tankers under construction in Korean shipyards.

Tanker disconnect no end in sight – Over the last couple of years, we have highlighted the underperformance of tanker shares (red line chart left) compared with general financial indices (blue line: FTSE), and crude oil prices (green line: WTI). While stock markets and commodity prices were in recovery mode from 1Q09 to mid 2011, tanker prices showed very little improvement. As a result, it was increasingly difficult for tanker companies to convince investors that the performance of the tanker sector is linked with the fortunes of the global economy, the rise of China or the crude oil demand story. It is obviously no consolation that the recent fall in stock markets and commodity prices has been just as dramatic as the recent falls in tanker shares. It is crucial that the tanker sector gets fleet supply back on track in order to reconnect with the wider markets and with

investors.

Analysis of 2Q11 Listed Tanker Company Results Tanker companies continue losing streak In 2Q11, the tanker sector recorded its largest cumulative net profit loss since the onset of the great recession in 4Q08. Worse still seven of the last eight quarters have been in negative territory. This dismal performance is reflected in the chart (right) showing collective net profit by sector (see orange line for tanker collective net profit). After two negative quarters at the end of 2009, collective net profit for listed tanker companies (a) turned positive in the first quarter of 2010. However, tanker rates deteriorated in the summer causing collective net profit to turn negative once again. The third quarter proved to be especially poor – although, at least results were not as bad as in 3Q08. However, 4Q10 showed no improvement as the energy continued to be drained from the sector. Early promise in 1Q11 was snuffed out in 2Q11 with results undermined by the closure of refineries following the Japanese earthquake, the loss of Libyan oil production, and the unexpected release of 60MnTons of crude oil from the SPR It is obviously no consolation that the Container sector (dark red line) – which had performed fairly well in 2010 - has seen its profits fall even faster than in the tanker sector during 1H11. Dry bulk collective net profit (green line) tumbled during 1H11 but results have not yet fallen into negative territory. Shipyard results (blue dotted line) also weakened in 1H11 but remained much healthier than for shipowners. Looking at individual tanker companies – only 6 out of the 19 listed tanker companies for which we have obtained first and second quarter 2011 results returned a profit. Ship Finance International made the healthiest returns during this period. Clean Product Partners (73%), Concordia (79%), DHT (90%), Knightsbridge (75%), and Teekay Tankers (12%) were the other companies in the black. The percentage figures in brackets indicate period time charter coverage through to the end of 2011. This suggests the importance of having secured long term period coverage before the onset of the great recession. Of this group, all bar Teekay Tankers can boast strong period coverage in 2012 as well. (a) The analysis covers 19 listed tanker companies for which we have second quarter 2011 data No recovery until 2016? Few shipowners are talking about an early end to the poor run of results. Indeed survival remains the watch word. The big owners in particular seem to be preparing their shareholders for a protracted

Briefing Series

downturn. For example - while suggesting that the market would probably not get worse, Frontline CEO Jens Martin Jensen indicated that he did not expect a recovery before 2016. This year also appears significant to OSG which has pushed back its major refinancing needs to the end of 2016 with the completion in May of a USD 900Mn unsecured forward start revolving credit agreement that matures on December 31, 2016. President and CEO of OSG, Morten Arntsen appealed for investor loyalty by asking shareholders to remember that, despite having to cut its dividend in 2Q11, OSG had been able to maintain its dividend policy for 150 consecutive quarters. He went on to say, “I am confident that OSG is extremely well positioned to remain one of the strongest‐performing companies in the sector, both during a prolonged downturn and throughout the eventual recovery in the shipping market.” One owner that appeared set to buck the trend for investment aversion was DHT Holdings which announced its intension in May to acquire Saga Tankers. However, its purchase offer was withdrawn in early August as global economic sentiment turned decidedly off colour. Efforts to repair balance sheets becomes even more urgent Jens Martin Jensen acknowledged that, "The financial turmoil has pushed the industry's confidence level to a new all-time low”. When Omega Navigation filed for Chapter 11 in July, it was becoming clear that some companies were now looking over the edge. The series of charts comparing market capitalization with debt shows that the balance sheets of almost all tanker companies are under water. Knightsbridge, NATS and Teekay Tankers remain the exceptions. With the majority of companies still hemorrhaging cash and with the burden of tanker fleet over supply combined with the very fragile economic outlook, shipowners have intensified their efforts cut costs and increase cash Cutting Costs: Frontline has perhaps been one of the most aggressive shipowners in terms of cutting its costs. In August, it announced that it was putting some of its VLCCs into layup. It also confirmed that its newbuilding programme had slipped back by 4 to 5 months with positive result of pushing back its finance payments. The imperative to renegotiate loans to ensure stability and reduce costs has seemingly never been far from shipowners thoughts in recent years. In June, Euronav announced that it had signed a new USD 750Mn forward start senior secured credit facility. Also in June, D/S Torm reported that it has secured USD630Mn in medium term bank financing. In July, Genmar announced that it had renegotiated both its revolving credit facility and senior secured credit facility. It is apparent that banks, suffering their own balance sheet problems, are more inclined to renegotiate than foreclose at this stage in the cycle as a means to keep bad debts off their books. It remains to be seen how long this relatively benign environment for shipowners continues. Raising cash: Some companies are still feeling strong enough to seek equity. One such company is DHT which filed a registration statement in September with the US SEC to sell from time to time common stock, preferred stock and debt securities in one or more offerings up to a total amount of USD 300Mn. Frontline has indicated that it will be looking at divestments in the near term as a means of generating cash, and has put its fleet renewal strategy on the back burner with the announcement of a “more passive investment philosophy”. Calls for industry to stand together to resist cost cutting pressures from industries higher in the food chain. Jens Martin Jensen has urged shipowners to refuse to take negative earnings. He also exhorted shipowners to work together by lowering the speed of their tankers as a means of lowering supply. There is no escaping the downward pressure on results in the near term. Frontline warned its shareholders at the end of its 2Q11 report that, “It expects the weak trend in the second quarter results to be extended into the third quarter”. The question is how bad can it get, and how many companies will be standing when the light finally appears at the end of the tunnel.

Results Page: Listed Tanker Companies – Results 2Q11

USSP emerges from bankruptcy Nov 2009

Results Page: Listed Tanker Companies – Market Cap v Debt 2Q11

orange line = market capitalization, blue line = debt

Chronology of Oil Market Events May-August 2011 – and how the oil price was influenced Source: C.R. Weber, Oil & Gas Journal, BBC, and industry publications This is a daily record of events in the oil market. Each daily entry starts with the price for WTI. The colour coding is to show the direction of influence on the oil price, where blue indicates a downward impact on prices – while orange indicates a price accelerator. Red text identifies events from the financial markets that spilled over into the oil market. Summary – Prior to the onset of the Great Recession, crude oil traded primarily on fears of supply disruptions, and not a little blind faith (oil prices soared). With the onset of the downturn, crude traded primarily on fears of economic collapse (prices plummeted). Entering 2009, there was a period of uncertainty with crude traded primarily on the belief that demand was falling faster than supply (prices stagnated at low-mid USD40s per barrel). Following the G20 summit in London at the start of April, a belief that depression has been averted emerged. The market believed that the global economy probably reached bottom in 1Q09, and confidence tentatively crept back into stock markets pulling commodity prices up too (oil prices back above USD70Bbl) despite fairly weak S/D fundamentals. Tanker rates bumped along the bottom for most of 2009 before showing some signs of life at the end of the year. From May 2010, fears of a Eurozone meltdown and possible double dip dominated sentiment. In November 2010, confidence improved, despite continued Eurozone worries, on signs that that QE2 was having a positive effect on the US economy, and that China was getting to grips with inflation. Tanker rates finally started to show some signs of recovery at the very end of 2010 in part due to extreme cold weather along the US eastern seaboard and in Northern Europe. In January 2011, North Africa erupted and oil prices soared as the market worried about the possible closure of the Suez Canal, the loss of Libyan production and the potential for civil disorder to spread as far as Saudi Arabia. The tanker market battered by high newbuilding deliveries saw it rates fall back to break-even levels.

As it happened

North Africa in turmoil. Fears of supply disruption send oil prices soaring. Tanker rates go the other way

After G20 Summit in March 2010, a belief took hold that ‘depression’ averted and the worst was over

After Greek bailout the market fixated on double dip recession with onset of “post stimulus” phase of the recovery

Eurozone fears persist QE2 injects some confidence.

Sep 13 USD – IEA revises down its oil forecast for 2011 (89.3Mnbd, +1Mnbd) and 2012 (90.7Mnbd, +1.4Mnbd) by 0.2Mnbd and 0.4Mnbd respectively Sep 12 USD88.18 – Italy turns to China to seek significant purchases of its bonds Sep 9 USD87.23 – Obama proposes new stimulus initiative - a USD447Bn jobs proposal Sep 8 USD89.04 –

Sep 7 USD89.08 – German court upholds Eurozone rescue - Sep 6 USD86.31 – Sep 5 USD83.56 – Sep 2 USD86.43 – Sep 1 USD89 –

Aug 31 USD88.75 – The global manufacturing recovery appeared to have come to a grinding halt in August, according to a raft of activity surveys across Asia and Europe Aug 30 USD88.79 – Consumer and investor confidence indices are today comparable to levels last seen in the last quarter of 2008 and first quarter of 2009 and the European indices have plunged back to the levels of the summer of 2009 Aug 29 USD87.16 – Yoshihiko Noda to be Japanese PM Hurricane Irene weaker than expected. Aug 26 USD84.96 – Japanese Prime Minister Naoto Kan has announced his resignation as party leader, clearing the way for Japan's sixth leader in five years. The move had been expected – criticized for poor leadership following the earthquake, he survived a no confidence vote in June only by agreeing to go at a future date.

This week has led up to the speech today by Federal Reserve Bank Chairman Ben Bernanke. Against most expectations, Bernanke proposed no QE3 US gearing up for hurricane Irene expected to make landfall along east coast at weekend. Aug 25 USD85.23 – Gaddafi loyalists continue rearguard action in Tripoli. Fed likely to leave door open for QE3 – but some see QE as only boosting assets (e.g. share prices) artificially. Oliver Jakob commented, “The Fed’s problem is that gains in the S&P 500 have proven “transitory” compared with the increase in commodity prices”. EU plans to impose embargo on Syrian oil next week.

Aug 24 USD84.91 – Moodys downgrade Japanese credit rating citing instability of

political leadership. Rebels in Libya enter Gaddafi’s compound in Tripoli and declare victory – although somewhat prematurely as skirmishes continue. Aug 23 USD85.39 – According to the OECD, growth across its 34 member states has now slowed for four successive quarters. The rate of growth in the year to June was just 1.6%, compared with 2.4% in the year to March, the sharpest quarterly collapse since the recession ended in the final months of 2009 Saudi Aramco, which last year accepted oil storage space in Okinawa from the Japanese government, will this month begin to send shipments of oil stored in Japan to the US West Coast. ConocoPhillips has chartered the 600,000-bbl MT Blue Sea to load in Okinawa on Aug. 24, with the oil scheduled to reach Pacific Coast refineries by mid-to-late September. Saudi exports to the US via East Asia are to be viewed in the context of competition with Russia’s ESPO blend. Aug 22 USD84.28 – JP Morgan revised its oil demand growth expectation for 2012 by 500,000 b/d Aug 19 USD82.81 –

Aug 18 USD82.38 – Stock markets plunge again – FTSE falls 4.5% worse daily fall since 2008. US President Barack Obama signed an Executive Order imposing additional sanctions against Syria’s government, freezing any of its assets in the US, and banning the import into the US of petroleum or petroleum products of Syrian origin. Aug 17 USD87.53 – UK unemployment rises by 38000 in June against an expected fall of 10000.

Aug 16 USD86.65 – German GDP growth just 0.1% in 2Q11 export rise offset by imports and fall in private consumption Concern mounting over new austerity measures in Italy and Spain. In an interview with the FT, the head of the IMF, Christine Lagarde, warned governments

that they must balance spending cuts with measures to support growth to avoid the risk of a double-dip recession Olivier Jakob said, “Our opinion remains that to have a sustainable rally in crude oil some good economic signs are needed; oil prices cannot forever be supported just because the dollar is weak due to a worsening economic picture in the US.” He also believes that with economic growth in 2H11 unlikely to match growth in 1H11, and with consumer and business confidence on the wain as a result, a return to USD120Bbl oil prices will have a much greater impact on consumption than in the first half of the year Merkel and Sarkozy meet but don’t deliver anything of substance – a case of fiddling while Rome burns. Aug 15 USD87.8 – Better than expected Japanese 2Q11 GDP growth.

Aug 12 USD86.02 – Banks get relief with ban on short selling Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, reported, “Oil prices have rallied USD10Bbl off their lows as the market begins to price in a less apocalyptic macroeconomic scenario and to row back from the undershooting of prices below sustainable levels seen over the past week. Even with a reduction in gross domestic product growth rate expectations, the oil market is likely to stay in [a supply] deficit in 2011 and will require more [oil from the Organization of Petroleum Exporting Countries] to balance. We expect the call on OPEC crude to be 1.3Mnbd higher in the second half of this year than it was in the first half” OPEC has proven more adept at reducing production to raise oil prices than increasing production to balance low supply with increased global demand, said analysts at the Centre for Global Energy Studies (CGES), London. Its slow response to the surge in oil demand in the second half of 2010 as the world recovered from the broadest and deepest recession since the 1930s and its tardiness in replacing the production lost because of Libya’s civil war this year were key factors in propelling the price of North Sea Brent to an average USD118/bbl in the second quarter of 2011 from an average USD78/bbl in the third quarter of 2010, they said.

Aug 11 USD85.46 – French records zero GDP growth in 2Q11

Aug 10 USD83.03 – IEA 2011 world oil demand forecast cut by 0.1Mnbd to 89.5Mnbd (+1.2Mnbd, +1.4% yoy). The 2012 outlook is raised by 0.1Mnbd to 91.1Mnbd (+1.6Mnbd, +1.8%yoy) due to oil-fired power needs in Japan. Aug 9 USD79.3 – Europe faces stark choice either to force some of smaller countries out of the Eurozone

or for the stronger countries to assume responsibility for the bloc's debts as a whole UK factory

production suffers shock 0.4% fall in June Pressure on markets eases as US Fed commits to leaving interest rates unchanged for 2 years. OPEC 2011 world oil demand forecast cut by 0.15Mnbd to 88.14Mnbd (+1.2Mnbd, +1.4% yoy). It also revised down its 2012 forecast slightly to 1.3Mnbd Aug 8 USD81.25 – Syrian government takes advantage of global preoccupation with financial crisis to attack eastern

Syrian city of Deir al-Zour killing at least 38. Asian stock markets slide. European stock market stabilize after ECB announced intention to buy up government bonds – but another short term fix to buy time and market needs more. European stocks start to slide later in the day (FTSE down 3.4% on the day) The main US share index, the Dow Jones, plummeted 5.6%, despite US President Barack Obama moving to try to reassure investors Nigeria will inject 679Bn naira (USD4.5Bn) into three banks nationalized by the

government two days ago in a further step to restore stability in the banking system of Africa’s biggest oil producer

Global Banks Poised to Slash 101,000 Jobs in Fastest Reductions Since 2008 FTCC reports increasing concern about inflation in China – It notes a China Confidential survey of 600 urban middle class in late July, 73.5% complained that their cost of living had increased from a year earlier with the mean increase of 17.8%, the highest recording since CC started tracking the data point in April. It also notes there are increasing signs of near defaults among local government financing vehicles. The situation has heightened concerns over the state of the domestic financial system which FTCC has previously described as a ticking bomb.

Aug 5 USD86.87 – Stock market slide continues around world – slightly better than expected US job creation figures and Italy’s announcement of economic reforms moderate falls – but US likely to lose S&P AAA credit rating. Chinese decided to add its criticism to the US handling of its self inflicted crisis – According to the FT China’s intervention after the downgrade – a strongly-worded commentary by the official Xinhua news agency rebuking the US for its fiscal policy and calling for a new global reserve currency – was notably irresponsible. It was in nobody’s interests, least of all China’s given its massive

holdings of US Treasuries, to roil the waters in that way. This is a moment for enhanced co-operation, domestically and internationally, not theatrical remonstration. A more enlightened Chinese currency policy is at least as important a component of that co-operation as greater probity in US fiscal policy. Rioting in London lasting several days – seems more driven by opportunism and social networking sites than economic resentment.

Governments are risking a double dip recession by (1) concentrating too much on debt and not enough on growth (Richard Koo), and (2) not acting fast enough or rationally enough e.g. Market eventually turning against 21/7 Eurozone bailout agreement because does not go far enough in providing a safety net for struggling countries when it can afford to do so (wants Italy in particular to get its house in order first). Market unimpressed by US debt limit deal 1/8 because arrived at irrationally with politicians artificially creating a crisis (over extending the debt ceiling limit). The result for the US is that it is set to lose its S&P AAA credit rating, although the markets may already have factored this in. Markets want (1) a return to the world working together as it did when the Great Recession first hit, and (2) decisive action to support faltering nations. Aug 4 USD86.73 – Japan moved to stop the yen rising against the dollar by buying its currency, to protect the

competitiveness of its exports Fears that US could slide into recession continue to mount and stock markets slide. Mr Knapp of Barclays Capital said the combination of the deepening slowdown in the US and the prospect of Spain and Italy becoming further ensnared in the region’s debt turmoil is the most troubling for the markets. “When the outlook for the US is good or OK, people find it much easier to deal with the problems in Europe,” he said. Martin Feldstein, a Harvard University professor and leading economist,

put the chances of the country sliding back into a downturn at 50:50. ECB commits to boosting Eurozone liquidity in an effort to reduce financial tension. When the eurozone debt crisis erupted in May last year the ECB launched its securities market programme, under which it has acquired €74Bn of bonds issued by the

Greek, Irish and Portuguese governments. But the programme has lain dormant since March Barclays Capital cuts its oil demand growth forecast for 2011 from 1.7Mnbd (June) to 1.1Mnbd. Aug 3 USD91.85 – The UN Security Council adopts its first clear condemnation of Syria for its crackdown on protests,

after the army continued its advance into Hama. Stock markets into reverse. Are we heading for a second global financial crisis? Some argue (Richard Murphy) that the financial imbalances will trigger the next crisis with too much unproductive money being held by wealthy individuals working in an alternative feral economy who are (1) not prepared to engage with the real economy, and (2) seek to benefit from breaking the real economy. Murphy sites how the share of real wages in GDP has fallen from about 58% in 1980 to about 53% now. He argues that the feral economy needs to be brought to heal. (1) Force pension funds to invest in green, and (2) if necessary the countries of Europe and beyond will have to demand that banks deposit their cash in Treasury deposit receipts with central banks (as happened in the UK in the second world war) to ensure resources are taken out of the feral economy and made available for the public good at a time of national and international crisis. Aug 2 USD93.76 – Hosni Mubarak – former Egyptian President – trial begins. Gives fresh impetus to Arab Spring, which is looking like pettering out even in Egypt. US Senate approves debt limit deal.

Aug 1 USD94.96 – Obama announces deal on US debt limit and approved by House of Reps - but US may still downgraded by credit rating agencies by the end of the year Syrian government forces kill estimate 100 civilians during crack down on Hama. UN

poised to increase sanctions, but military intervention impossible. Italy’s sovereign debt coming under the spotlight along with that of Spain amid fears the turmoil will claim a nation that is "too big to bail" Jul 29 USD95.66 – Syria’s authorities blamed saboteurs for the bombing of a major oil pipeline that carries crude

westward to the 132,725-b/d refinery at Banyias from oil fields in Deir el-Zour province. Talk of a double-dip recession sweep markets, when it emerged the US economy barely grew in the first half of the year Jul 28 USD97.46 – Tropical Storm Don looks like being boon to Texas farmers rather than threatening devastation Centre for Global Energy Studies (CGES), London, noted the front-month ICE September Brent crude contract hovered

around USD117/bbl all this week and that, “This resilience is slightly surprising, given the headwinds that are impeding the global economy at present.” Jul 27 USD98.26 – Tropical Storm Don a potential threat to US. The EIA said commercial US crude inventories increased 2.3MnBbls to 354MnBbls in the week ended July 22, the reverse of the Wall Street consensus for a 2MnBbl draw. Jul 26 USD99.59 – Jul 25 USD98.96 – US crude oil production fell to a 2-year low and showed year-over-year declines for the second month in a row, according to the latest monthly data from the American Petroleum Institute – while commercial stocks remain at high levels.

Jul 22 USD99.48 – US debt default crisis looms as Democrats and Republicans struggle to agree increase in borrowing limit threatening possible default and downgrade by ratings agencies. Expect tough negotiations with 11th hour agreement Iran has halted exports of crude oil to five of India’s refiners as a result of an impasse over the payment of USD5Bn for previous supplies, according to company executives and government officials.

Jul 21 USD98.99 – Eurozone crisis averted as latest Greek bailout agreed – default or not a default that is the question as Greek debt is renegotiated at lower interest rate and extended period with government and private lenders expected to absorb the pain. The IEA announced its completion of a 30-day review of the Libya Collective Action launched on June 23. IEA said it would take additional action if market conditions warrant. The review concluded that the release of strategic stocks of oil among IEA member countries served a market need by adding liquidity and bridging the gap to additional supplies from OPEC.

Jul 20 USD98.09 – Crisis point in Eurozone - Fears that failure to finally resolve the Greek debt crisis will consume the Eurozone and in particular European banks. Indian refiners, faced with Iran’s uncertain ability to provide adequate levels of oil supplies, say they are now looking to Kuwait, Saudi Arabia and the UAE for increased shipments of crude oil. Jul 19 USD97.5 – US lawmakers appear to be moving closer to negotiating a compromise on raising the US debt ceiling. President Barack Obama said he supported a USD3.7 trillion deficit reduction plan. Jul 18 USD95.94 – Gold breaks through USD1600oz barrier for first time on worries about debt in US and Europe. “Oil slid sharply yesterday, mostly on concerns over a sluggish US recovery (in light of last week’s economic data), coupled with global sovereign debt fears,” said Marc Ground at Standard New York Securities Inc., the Standard Bank Group. Jul 15 USD97.22 – US consumer confidence for July fell to 63.8, the weakest reading since March 2009. Jul 14 USD95.67 – With the next official meeting of OPEC scheduled for Dec 14, it is unlikely that OPEC will come to

an agreement to increase production – therefore, suggested by some that further IEA SPR release likely Federal Reserve Chairman Ben Bernanke said he isn’t inclined to embark “soon” on a third economic stimulus (opened then shut the door) S&P placing US on review for possible downgrade of debt rating Jul 13 USD98.02 – What happened to no QE3 as Federal Reserve Chairman Ben Bernanke indicated an additional monetary stimulus may be in the works. The EIA said commercial US crude inventories dropped 3.1MnBbls to 355.5MnBbls in the week ended July 8. Jul 12 USD97.4 – IEA revises up its forecast for 2011 demand by 0.2Mnbd to 1.2Mnbd with oil demand expected to rise by 1.5Mnbd. For both 2011 and 2012 declining OECD demand is offset by ROW. In its report IEA discussed last month’s coordinated release of 60MnBbls of strategic oil stocks among its members as a response to the ongoing Libyan crisis. The so-called “Libya collective action” aimed to provide a bridge between rising oil demand in the third quarter and extra supplies made available by major OPEC producers, the agency said. OPEC by contrast sees crude oil demand growth slowing from 1.36Mnbd in 2011 to 1.32Mnbd in 2012. Jul 11 USD95.14 – Asia stocks fall on fears that European debt crisis could spread to Italy and Spain. Bank of Japan downgrades Japan’s growth forecast. Banking shares in Europe still taking a pounding. As current holder of OPEC’s rotating Presidency, Iran felt able (Jul 9) to define OPEC’s policy as being opposed to any increase in output ceilings in the absence of "well-studied justifications." Seven of the 12 members of OPEC voted against an increase in production at the Jun 8 meeting. Iran believes the market is well supplied with oil Jul 8 USD96.18 – The ADP private employment report showed U.S. private payroll gains in June of 157,000 jobs—significantly higher than the 36,000 in May, but still below the 200,000-plus average between December and April.

According to RGE, The austerity package approved by the Italian government in late June is largely devoid of structural reforms, instead relying on spending cuts and moderate tax increases to eliminate the budget deficit by 2014. Given the back-loaded nature of the austerity measures, contagion risk is likely to remain elevated as markets may grow impatient and require immediate action. Also concerned by Silvio Berlusconi’s comments in a newspaper interview that the austerity plan might not have full cabinet support. In a sign that investors are growing more risk averse, the yield on Italian 10-year bonds jumped to 5.6% from 5.3%. Meanwhile, yields on 10-year bonds issued by

the Spanish Government rose to 5.9%, from 5.7%. NATO attacks Libyan government oil fields for the first time. Economic optimism following yesterday’s private sector job news was stopped in its tracks when the US nonfarm payrolls and the unemployment level came out to be much worse than any of the expectations. The US unemployment rate inched up 0.1% to 9.2%. Oliver Jakob commented, “It is only a small increase, but it is also the third month where the unemployment rate has increased and compared to the 9.5% of June 2010, it is difficult to talk of any significant improvement, especially since the participation rate continues to trend lower and at 64.1%

(compared with 64.7% in June 2010) is at a 25-year low.” Petrobras oil production hit by union dispute KBC Energy Economics contends that Saudi Arabia appears to be backtracking on increasing production. It argues that an oil producer trying to sell 1Mnbd of additional supply frequently will cut his price to lure refiners. “But this is not what Saudi Arabia is doing despite pledging additional supplies to the market,” KBC said, “Refiners look likely to balk at these prices. That would allow Saudi Arabia to claim that there is no demand for the extra barrels, so there is no need to raise production to 10Mnbd.”

Jul 7 USD98.68 – The ADP national employment survey for the US private sector came in at 157,000 new jobs added, much higher than the market consensus of 70,000. Also, new US unemployment claims for the week were slightly below consensus  Euro stabilizes in part because Spain successfully auctioned €3Bn of medium-term bonds in a robustly subscribed auction the ECB raised the key rate by 25 bps to 1.50%. The ECB had also suspended rating requirements for Portuguese-backed collateral—as it had already done for other IMF/EU program candidates, Greece and Ireland—following Moody’s downgrade of Portugal’s credit rating. Jul 6 USD96.64 – Moodys warns of second rescue for Portugal. ECB hits back at rating agencies (self fulfilling prophesy) after Portugal also had a go following threat to downgrade FTCC believes that the PBoC decision to raise benchmark lending and deposit rates by 25 basis points each indicates pre-emptive action ahead of high inflation numbers to be announced later this month. The FTCC does not think this rate hike significantly increases the remote possibility of a hard landing for GDP growth later this year

Jul 5 USD96.84 – RGE highlights higher than previously assumed Chinese local government debt – as much as USD4.6Tr equivalent to 77% of GDP Jul 4 USD94.97 – Stock market rally following apparent success of latest Greek bailout set back as S&P warns on Greece. RGE’s view of recent manufacturing indicators is that they are in line with expectations – “While global PMIs are still positive, the June PMI for China fell nearly to the neutral mark and those for Europe also reflected a slowdown in manufacturing activity. In contrast, after a period of softening the U.S. ISM has increased. Recent PMI trends have been in line with RGE expectations for decelerated global growth in Q2 2011 and with our baseline scenario of a subpar, below-potential expansion in advanced economies and a slight softening of growth in emerging markets”. RGE wonders in Egypt is heading down the wrong path – “The Egyptian government has rejected any conditionality attached to IMF loans in favor of blank checks from Saudi Arabia and regional partners, lest it have to tie its hands ahead of presumed fall elections. The revised budget seems optimistic in its revenue, expenditure and growth

estimates”. US Federal deficit reduction talks will be a key factor this week – signs not altogether positive. Jul 1 USD94.79 – UK manufacturing slows to 21 month low. China factory activity lowest for 2 years.

The Department of Energy described interest in the tender of crude from the US strategic reserve as “very high and oversubscribed. We can therefore expect that all of the 30.2 million sweet bbl offered will be taken, and the question now is where do we find the spare storage tank capacity to hold all those barrels?” Oliver Jakob said, “We count five large international oil-trading companies taking floating storage options in tankers (a mix of very large crude carriers and Suezmaxes). Some oil might have to stay on the water while some room is made in the onshore tanks.” He expects WTI to come under downward pressure. Jun 30 USD95.28 – Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, “After an initial fall, prices have rallied. The back of the curve has risen, given that the release is primarily a way of borrowing oil from the future into the present because the strategic reserves will ultimately be replaced. Overall, we see the IEA action as being well motivated, but a shot in the dark; in our view, the impact on oil politics and on market perceptions raises the danger of some significant distortions.” Cumulative loss of Libyan production now stands at 182Mnbbls—“primarily diesel-rich light crude bound for Europe,” Horsnell reported, adding, “The first IEA release is one third of that amount, split across regions and between crude and products.” Turkey produced better than expected figures for 1Q11 GDP growth of 11% yoy.

Jun 29 USD94.83 – Greek Parliament votes to pass austerity measures as rioting continues on streets. EIA reported commercial inventories of benchmark US crude (excluding US SPR stocks) fell 4.4MnBbls to 359.5MnBbls in the week ended June 24, well past the Wall Street consensus for a 1.5MnBbls draw. Jun 28 USD92.88 – Oliver Jakob points out that “Year-to-date losses in the banking sector are starting to reach critical levels and the big Wall Street firms are starting to test their 2010 lows….” The stock market is following the fortunes of a financial sector which can’t quite recover. Growing optimism that Greece will not default as it considers selling off/privatizing government assets IEA indicates that most of the reserves release in Europe will be of petroleum products not crude oil. Oliver Jakob argues that “The only thing that matters is the 30Mnbbls of sweet crude oil released in the US for its impact on the Brent market. Looking at Brent regaining a premium to West Texas Intermediate yesterday one would think that the SPR does not matter. But Light Louisiana Sweet (LLS) is diverging from Brent (LLS to WTI is narrowing while Brent to WTI is widening) There are reports

of VLCCs with floating storage options in USG OPEC moans at IEA for oil release - Abdullah El-Badri, secretary general of the Organization of the Petroleum Exporting Countries, urged the International Energy Agency to reverse its earlier decision to release 60 million bbl of oil over the coming 30 days. “I hope this practice will be stopped and stopped immediately,” El-Badri told a news conference in Vienna after the scheduled 8th ministerial-level meeting of the energy dialogue between OPEC and the European Union. “We don't see a good reason to release this quantity, and I hope the IEA will refrain from using this practice,” El-Badry said, also telling the Kuwait News Agency that IEA had wronged OPEC with its decision to release the oil. Jun 27 USD90.63 – Chinese signs £1Bn trade deal with UK during Wen Jiabo’s visit to UK - Chinese Premier appears to acknowledge part that China’s massive trade surplus played in the crisis, and sees deal as part of process of reducing China’s dependence on exports and increasing the size of its domestic market. Analysts primarily agree the IEA release of oil will put more downward pressure on the higher Brent crude prices than on WTI – in part because of the shortage in US commercial storage capacity in the USGulf and Midwest means that it is likely that some import barrels will have to be redirected to Europe and the Far East, especially crude oil of West African origin. Final 1Q11 US GDP figures slightly higher 1.9% from 1.8%. However, a number of commentators have revised down their forecasts for 2Q11. Jun 24 USD90.41 – Chinese premier declares victory over inflation. Nouriel Roubini and the RGE Economic Research Team: Our baseline recovery scenario remains one in which most developed markets (DMs) continue to follow an anemic, subpar, U-shaped path, hindered by ongoing balance-sheet repair, structural issues and the switch from monetary and fiscal stimulus to policy drag. Meanwhile, emerging markets (EMs) will continue to power ahead, though their expansion will fall short of 2010 rates as growth converges toward potential

With oil consumption falling in the West, it is arguable that IEA participants will need less inventory to satisfied the required stock-to-demand ratios. So it may not be necessary to replace the sold crude at a later date “Oil prices have been retreating, but not fast enough to suit policy makers,” Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC. “The IEA sees the release as an effort to break the logjam, while giving the Saudis time to gear up output and maybe buying a bit of time to see if the opposition forces in Libya can ship some oil. The ‘natural’ correction in the market was not coming from rising supplies, but rather from demand being crushed by a slowdown in the global economy. This is not the IEA’s preferred economic solution to the loss of supply.”However, he said, “The IEA’s stock draw is a risky move in our view since it is mostly a short-term fix to a problem with many long-term components. Saudi output is rising in June, with more estimated to be coming in July, and so there has been some concern that the IEA release might undermine their efforts. In our view, probably not, since the available Saudi oil is heavier and higher in sulfur than the missing Libyan barrels. The IEA release will be US light, sweet crude and light, sweet European products.” In Houston, however, analysts with Raymond James & Associates Inc. noted some members of the Organization of Petroleum Exporting Countries have cautioned the IEA's decision could trigger a retaliatory response, possibly prompting producers to “mend fences” within OPEC in attempt to inflate oil prices.“OPEC countries have stepped up spending this year to create jobs and build housing and now rely on a higher oil price in order to cover these costs. Some believe that if Brent continues its slide below USD100/bbl, OPEC may consider cutting output. It is of some analysts’ opinion that this action by the IEA will backfire if it alienates oil producers, lessening the incentive to raise production,” they said.

Jun 23 USD90.24 – The west releases oil from emergency stocks.

Oil prices tumble after western nations surprised the market, releasing the biggest amount of oil from their emergency strategic stocks since 1991, in a calculated shot across the bows of OPEC, the oil producers’ cartel. Oil prices fell dramatically after western nations through the International Energy Agency (IEA) took the market by surprise by releasing oil from their emergency strategic stocks for only the third time since 1974 when the IEA was created to offset the influence of OPEC. Following the failure of the recent OPEC meeting to agree an increase in production quotas, Saudi Arabia has been under the spotlight to see if it could provide the necesary additional oil to meet rising global crude oil demand. However, the story moved on dramatically when the IEA agreed to release 60MnBbls to offset the 1.5Mnbd loss of oil from war torn Libya. The US provided 50% of the release with Japan, Germany, France, Spain, UK and Japan providing most of the rest. China was included in discussion, but it is not known whether it too intends to release oil from its own strategic reserves. The IEA took its decision to release the additional supplies because promised production boosts “will inevitably take time” and that the threat of a serious market tightening, particularly for some grades of oil, “poses an immediate requirement” for

additional oil or products to be made available to the market. The reserves have been tapped for emergency reasons only twice – after hurricane Katrina in 2005 and in 1991 after the first Gulf war. Libya’s oil exports could rise by as much as 355,000 b/d from areas held by rebel forces according to a report by Goldman Sachs. Libya’s oil production has declined to less than 200,000 b/d from the 1.5-1.6 Mnbd produced before the outbreak of hostilities in February. Jun 22 USD94.92 – In the June Federal Open Market Committee (FOMC) meeting, the Fed acknowledged the "somewhat slower than expected" pace of the recovery but attributed it to temporary factors. Jun 21 USD93.68 – The Greek government wins a confidence vote in parliament as it struggles to win support for

extra austerity measures and avoid a default. However, market consensus expects “inevitable” Greek default. Jun 20 USD93.21 – President Assad broadcasts to the Syrian people for the first time in two months – claims that his people love him despite more than 60,000 people on the most wanted list France and

Germany indicate commitment to bail out Greece despite UK’s opposition. Goldman Sachs Group Inc. revised its estimate for the US 2011 GDP growth from 3% to 2%

Jun 17 USD92.96 – Greece debt crisis rumbles on with UK refusing to help bail out and further rioting in streets. Jun 16 USD94.96 – EIA reported commercial inventories of US benchmark crudes dropped 3.4MnBbls to 365.6MnBbls in the week ended June 10, exceeding the Wall Street consensus for a 1.8MnBbls loss Greek PM to Form New Cabinet and Seek Vote of Confidence. IEA June forecast for crude oil demand growth in 2011 remains unchanged at +1.3Mnbd (+1.5%) yoy – but the call on OPEC increased by 0.4Mnbd (Half of the increase…is coming from downward revision to non-OPEC supplies (Europe and Latin America) and half from a downward revision to processing gains). IEA estimates that OPEC’s spare production capacity will be 37.9Mnbd well above the current estimated call of 30.1Mnbd

Jun 15 USD95.25 – US economic weakness and rising core inflation drags market down along with ongoing European debt crisis. The Empire state manufacturing index, the first monthly manufacturing survey to be released in June, showed continuation of the contraction in manufacturing activity that began in spring, with the new orders and shipments indexes falling below zero, while employment growth slowed sharply. The decline in the forward-looking new orders index and flat order backlogs suggests further softness in shipments in July.

Jun 14 USD99.35 – Spread between WTI and Brent reached record margin of USD21.8Bbl. Oliver Jakob commented, “Brent continues to trade at a higher a higher premium to WTI and in the process is creating its own island disconnecting from the rest of the world.” He disagreed that Brent is better benchmarked against S/D than WTI. The killing in Syria goes on. US retail sales in May were down 0.2%, but less than the 0.5% expected decline. According to James Zhang, “The US economy remains the most important underlying factor driving the oil market at the moment, particularly as the Federal Reserve Bank's second quantitative easing (QE2) program comes to an end this month.” Jun 13 USD97.34 – Tensions surrounding Greece not going away. Prospect of breakup of Eurozone within 5 years.

Jun 10 USD99.28 – Saudi signals unilateral production increase by between 0.5-1.5Mnbd. Iran described the failure of the OPEC meeting as a victory against the west. Iran’s nuclear ambitions raise tensions. Raymond James & Associates Inc. said, “While the world's attention has largely been focused on the events of the Arab Spring, Iran has continued to advance its nuclear program. The International Atomic Energy Agency's recent report on Iran indicated that the country has enriched 970 kg of uranium, bringing its total supply of reactor-grade enriched uranium to 4,105 kg. In addition, the regime's Revolutionary Guards Corps posted an article in April unabashedly discussing an Iranian nuclear test. Clearly, US and UN sanctions have done little to curb Iran's nuclear pursuits. As such, it will probably take more than finger wagging to derail Iran's nuclear agenda.” Equities on the slide. Oliver Jakob does not believe the oil price can stand on its own.

Jun 9 USD101.92 – Syrian army begins operations in Jisr al-Shughour, where the government said 120 security troops were killed. France and UK lead UN motion condemning Syrian action in repressing dissent. Slowing Chinese exports in May accentuate concerns about strength of global recovery Just about on track - The ECB kept its key interest rate unchanged at 1.25%, also upwardly revising its 2011 inflation mid-point forecast to 2.6% and signaling the need for "strong vigilance" with respect to future price stability in the eurozone.

Jun 8 USD100.75 – OPEC meeting fails to agree increase in quotas – suggestions that may be close to break up. Saudi Arabian oil minister Ali al-Naimi said the Vienna gathering was "one of the worst meetings we have ever had". Mr Naimi said seven of the cartel's 12 members had opposed a Saudi-backed proposal to raise OPEC's output. He listed Algeria, Angola, Ecuador, Venezuela, Iran, Iraq and Libya. Saudi may press on with plans to raise its output by 0.5Mnbd to 9.5Mnbd. The IEA noted “with

disappointment” OPEC’s failure to take action. “Of course what really matters is actual supply, which should move in line with seasonally rising demand, and we urge key producers to respond accordingly,” IEA officials said. “Ongoing supply disruptions, as well as the fragile state of global economy, call for a prompt increase in supply on a competitive basis that will allow refiners to boost throughputs and meet rising seasonal demand. Otherwise, a further tightening in the market and potential increases in prices risk undermining economic recovery, which is in the interests neither of producers or consumers.” Olivier Jakob said, “There were meetings where OPEC could not come to an agreement on a change of policy, meetings where the wishes of Saudi Arabia where not met, but we don’t recall a meeting that just split-up, without even an agreement on a communique and followed by all sorts of name-calling” as occurred June 8 The EIA reported commercial inventories of US benchmark crudes fell by 4.8MnBbls to 369MnBbls in the week ended June 3, exceeding the Wall Street consensus for 1.4MnBbls decline.

Jun 7 USD99.06 – Bernanke confirms that no QE3 (QE2 concludes end June) The good news is that this move suggests that the Fed Chairman is reasonably confident that the US economy can convalesce without any additional palliatives. Expectation that OPEC meeting in Vienna will raise quotas – although considered that Saudi production plans will have more importance than any formal agreement. RGE do not expect an increase in quotas. Jun 6 USD99 – In Yemen, the President Ali Abdullah Saleh leaves for medical attention in Saudi Arabia after bomb blast while praying. Doubts that he will make it back to Yemen. IMF cuts forecast for UK GDP growth for 2011 to 1.5%. Jun 3 USD100.22 – According to Oliver Jakob, “The week could not have been worse in terms of US macroeconomic data”. The May U.S. Bureau of Labor Statistics employment report showed a sharp drop in job creation, with payrolls rising 54,000 after average gains of 176,000 in the previous five months, hurt by a sharp contraction in government payrolls. The unemployment rate ticked up to 9.1%, from 9.0% in April. Oliver Jakob commented, “There are still 5 million jobs to be created before the losses seen since July 2008 are offset, and even after that the unemployment rate would not be back to 2008 levels due to the growing population factor” In Yemen, the President Ali Abdullah

Saleh refused to sign a GCC-mediated power transfer proposal for the third time in May. OPEC suddenly talking about raising production targets by 0.5-1.5Mnbd – ahead of Jun 8 meeting (official target hasn’t changed since 2008 when targets were cut by 4.2Mnbd). However, KBC analysts have questioned what increased quotas might actually mean. Official production quotas until recently have been “flouted by all but OPEC’s Arab Gulf members, and as oil prices have spiraled higher, the word ‘compliance’ has barely been heard in the corridors of OPEC …. Saudi Arabia has the only meaningful spare capacity to take advantage of any actual production increase, although it is by no means clear that this will be the upshot of any increase in the production target.” Iraq currently is outside the quota system, and not all OPEC members agree with their current production quotas. “So allocating the extra barrels to individual countries will be anything but simple, although a simple prorate reversal of previous cuts might provide a basis for discussion,” KBC analysts concluded.

Jun 2 USD100.37 – Indications that US and China cooling. US double dip being talked about again The EIA reported commercial inventories of US crude increased 2.9MnBbls to 373.8MnBbls in the week ended May 27—above average for the time of year. The Wall Street consensus was for a decline of 1.6MnBbls Japan’s Prime Minister Naoto Kan survived a no-confidence motion submitted by opposition leaders and supported by some members of his ruling Democratic Party of Japan. According to RGE, the German economy is set for another strong GDP expansion this year. It argues that the 1Q11 GDP breakdown confirms its view that the initially export-led economic upswing continues to broaden in light of increasing growth contributions from domestic demand. Jun 1 USD100.28 – More than 40 killed in Yemeni street fighting. UK manufacturing growth slows to 20 month low. Chinese manufacturing growth slows following government action to cool economy. Further growth slowdown possible as China increases electricity prices to curb power shortages. In May, U.S. private payroll gains of 38,000 jobs indicated easing growth for the third consecutive month and a sharp slowdown from the December-April average of above 200,000, according to the ADP private employment report NATA engagement in Libya to the end of September from the end of June – with Gaddafi’s positioning weakening, it is not considered likely that the operation will need to be extended further. May 31 USD102.68 – Greece bailout hopes rise Ceasefire in Yemen collapses. Japanese refinery throughputs at lowest level for 5 years Olivier Jakob said, “Making a positive spin out of the macroeconomic data released yesterday should be a difficult exercise for anyone. First of all the Case-Schiller Index of house prices showed a double dip, breaking the 2009 lows and falling to the lowest level since 2002. Then there was the Chicago PMI that showed the largest monthly drop since October 2008 [to the] the lowest level since November 2009.” News from Europe was not much better e.g. French consumer spending in April dropped 1.8% May 30 USD100.37 – Last chance African Union delegation to Libya fails to broker ceasefire Hundreds of soldiers storm Yemen protest camp in Taiz killing at least 20 More protestors killed in Syria over weekend after new outbreak of violence started May 27 Germany announced closure of all 17 of its nuclear power plants by 2022.

May 27 USD100.58 – G8 meeting Deauville. (USD12Bn to aid Arab democracies). Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, noted commodity index returns performed

strongly in the first 4 months of 2011. “However, a large portion of these gains have been wiped out in May. Since the fortunes of commodity index returns seemed to improve with the introduction of the Federal Reserve Bank's quantitative easing (QE2) program, it appears commodity markets are performing skittishly as this stimulus is removed. We expect this will prove temporary.” May 26 USD100.11 – The Standard Bank Group reassessed the impact of the war in Libya and the earthquake in Japan based on the latest data. “In the short term, global crude oil inventories have been drawn down much faster because of the supply shortfall from Libya. In addition, the decline in oil product inventories is more pronounced than those of crude due to losses in refining capacity in Japan. In the medium term, we see a further tightening in the oil market because it will take a long time for Libya’s supply to recover fully. Furthermore, military attacks on Libya’s oil fields and infrastructure might have caused considerable damage, which will take a long time to repair…… Oil demand is picking up, albeit at a slower pace, as the global economy grows. Therefore, we still see the risk to oil prices to the upside, although there is likelihood of limited downward corrections in the short term. In the medium term, the oil market seems heading for a structural bull market, with diminishing spare capacity and growing demand.”

May 25 USD100.73 – Venezuela’s President Hugo Chavez, irked by new sanctions imposed by Washington on state-owned Petroleos de Venezuela SA, said the firm may not be able to guarantee all future shipments of oil to the US. Chavez’s remarks came after the US imposed economic sanctions on PDVSA and six other foreign companies for working with Iran’s energy industry in ways that might bolster the country’s illicit nuclear programme. May 24 USD99.08 – Iran feeling the heat with blast at the new Abijan refinery, which has been built to overcome international sanctions that have left it very short of gasoline, and announcement that President Amadinejad will not be attending the June OPEC meeting. Ahmadinejad earlier said he would temporarily oversee the country’s oil portfolio

following his dismissal of Oil Minister Masoud Mir-Kazemi. Rising concern over European debt. Both the Goldman

Sachs Group Inc. and Morgan Stanley Capital Group overnight increased their price forecasts on a 12-month basis to USD130/bbl for North Sea Brent crude. That was after analysts at J.P. Morgan, one of the leading global investment banks, reiterated May 23 its earlier prediction that crude will be selling at

USD130/bbl by yearend. Oliver Jakob hinted that these forecast revisions may be an attempt to manipulate prices. He points out that now prices are sliding leading analysts claim the market is short of oil and struggling to deal with the loss of OPEC output, but when the prices were high they claimed the market was well supplied and well able to deal with the loss of Libyan oil with sufficient OPEC spare capacity. May 23 USD96.96 – Purchasing managers’ indices suggest that during 2Q11 Germany and France have not managed to sustain the rate of GDP growth. The German Bundesbank also announced that it expected German growth to slow Concerns over Spain and Italy regarding sovereign debt again surface RGE argue that signs of demand destruction in the face of high oil prices, associated gasoline price elevation and a weak U.S. outlook suggest that this

year’s U.S. summer driving season is likely to be muted. Obama makes Israel/Palestine 1967 borders speech again – first delivered Nov 2008. Following a Fitch downgrade and resurgence of sovereign risk after recent mixed messages on the likelihood of a future Greek debt restructuring, Greece has adopted a fast-track privatization package and new fiscal measures. UK Banks miss lending targets for SMEs. May 20 USD99.03 – Russian industrial production has been decelerating gradually in 2011, slowing to 4.5% yoy in April from 5.3% yoy in March; output and new orders slipped in April, while new export orders came in below 50, signaling contraction “The oil market is torn between continuously tightening [supplies] and signs of weakness in the US recovery,” said James Zhang at Standard New York Securities Inc.

May 19 USD97.89 – Japan returns to recession with GDP contracting (-3.7%) in 1Q11 for the

second consecutive quarter OPEC under pressure to increase production. The IEA’s governing board issued a statement during its regular quarterly meeting on May 19 appealing to suppliers to provide more oil to the market. IEA said it is prepared to use all tools at its disposal, which include releasing strategic oil reserves. May 18 USD99.5 – The EIA reported commercial US crude inventories were unchanged at 370.3 MnBbls in the week ended May 13, despite a Wall Street consensus for an increase of 1.7 MnBbls. However, Oliver Jakob sees strengthening oil prices as reflecting S/D factors. “The drop in US oil demand dwarfs the increase in oil demand from China, and the drop of US oil demand is about equal to the lost exports from Libya.” Jakob believes the low US oil demand explains low US refinery utilisation May 17 USD96.28 – Raymond James commented with the national debt at its limit, the second phase of the Federal Reserve Bank's quantitative easing (QE2) program to end in June, and much of Europe “still a train wreck,” economic unease weighed on the markets The controlled release of water from the Mississippi river on farmlands up-river appears to have reduced the risk of flooding for oil refineries near the Gulf Coast (which account for 14% of US capacity). May 16 USD96.66 – President Obama is sounding the alarm over any congressional failure to raise the

USD14.3 trillion debt ceiling. Obama said “if they thought that we might renege on our IOUs -

- it could unravel the entire financial system." Weekend arrest of Dominique Strauss-Kahn, the head of the IMF on attempted rape charges may have ramifications for global economic recovery even though he was due to stand down from the post within the month and announce his cadency for the French Presidency. His importance is that he fights in the Richard Koo/Gordon Brown corner and is a main driver encouraging European leaders to provide a comprehensive bailout for those Southern European economies that

are in trouble Walter de Wet at Standard New York Securities Inc., the Standard Bank Group argued much of the downside pressure on oil prices is coming from the stronger dollar. He noted that the large sell-off in West Texas Intermediate crude 2 weeks ago is reflected in the latest Commodity Futures Trading Commission data. Not only has the noncommercial longs decreased length substantially (from 432,000 contracts at the end of April to 389,000 contracts last week), noncommercial shorts have risen rapidly too. De Wet said, “The market is clearly less optimistic about crude’s prospects than a few weeks ago.” He said, “We therefore believe that crude oil will struggle to rally substantially in the coming days.” May 13 USD99.08 – Germany reports 1.5% GDP growth qoq (+5.2% yoy) beating expectations of 1% rise, while France also exceeded expectations at +1% Oil

minister describes Yemen on the brink of economic collapse Fear that rising Mississippi flood water may inhibit distribution of Louisiana refined products.

May 12 USD98.35 – IEA downgrades 2011 world crude oil demand by 0.2Mnbd to 89.2Mnbd (+1.3Mnbd, +1.5% yoy) based on persistently high oil prices + weaker IMF GDP projections for advanced economies. May 11 USD97.61 – Chinese inflation edges lower to 5.3%. Commodities fall as reports on inflation

from London to Beijing boosted expectations of higher interest rates. 18 killed in Yemen – a similar number killed in Syria Riots in Greece May 10 USD103.3 – Greek sovereign debt back in the news for the wrong reasons as downgraded again by S&P. James Zhang at Standard New York Securities Inc., the Standard Bank Group, reported, “Oil recovered strongly yesterday despite the euro weakening after Greece’s further downgrade.” According to the latest figures from the Federal Statistical Office, German exports in March grew by 7.4% mom, or 16% yoy Fear Mississippi flooding will disrupt fuel oil supplies May 9 USD100.2 – Negative sentiment about global economy to fore. May 6 USD97.31 – Fear of demand destruction considered more important than high geopolitical risk from a destabilized MENA region. At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, “The recent (oil price) turnaround was provoked by the market’s suddenly waking up to the demand destruction that has been wrought by higher oil prices. Unless there is another disruption to oil supply, it seems that oil prices have hit the wall. At this time they may now depart from the broadly parallel movement in prices to 2008 and move to below the lofty levels of the last oil price bubble.”

May 5 USD101.05 – Europe acts to weaken Euro and aid its exporters. Energy prices plunged after the European Central Bank (ECB) indicated it would not raise lending rates, causing the dollar to escalate nearly 2% over the euro and undermining dollar-priced commodities in one of the worst days for that market in years. Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, said, “The collapse in oil prices this week is more a positioning event than a change underlying fundamentals. Indeed, US energy prices overall and gasoline prices specifically are not at the point of breaking the back of the economy in our view.” Oliver Jakob believes that a fall in German manufacturing was behind the decision of the ECB President not to include the much-anticipated coded phrase, ‘strong vigilance,’ which tends to mean another rate increase in the following month. “One of the bearish triggers yesterday was the German manufacturing orders, which fell sharply by 4% vs. expectations of a small increase. It was thereafter probably not a coincidence that [ECB Pres. Jean-Claude Trichet] was suddenly mute about the next rate increase that would have given a further boost to the euro and choked Germany,” Concern over global economy another factor behind commodity prices to crash.

May 4 USD108.66 – The UK CIPS manufacturing PMI fell to 54.6 in April from a downwardly revised 56.7 in March—its weakest level in seven months—owing to weak domestic activity. Details of Portuguese EU debt bailout confirmed. National Employment Report showed 179,000 new private sector jobs were added in April, far less than expected. The Institute for Supply Management (ISM) reported its service sector index rose at the slowest pace in 8 months. The two reports signify a weakening economy. May 3 USD110.48 – The Energy Information Administration said May 4 commercial US benchmark crude inventories increased 3.4Mnbbls to 366.5MnBbls in the week ended Apr 29, above average for this time of year. The Wall Street consensus was for a 2MnBbls gain.

May 2 USD112.91 – Bin Laden killed (falling oil prices could this be due to a lower geopolitical risk premium? Most analysts think not arguing that revenge attacks anywhere around the world could most definitely destabilize the market) However, others believe bin Laden had become a peripheral figure. “While bin Laden's strident hatred of the Saudi royal family and other pro-western Arab regimes is well known, in the grand scheme of things it was a relatively minor destabilizing factor,” said Raymond James analysts. “Currently, what is unambiguously at the top of the list of oil market concerns is the tension between the Arab ‘street's’ demands for political and social reform and most Arab leaders' stubborn refusal to offer that reform. Bin Laden, and al Qaeda more broadly, are definitely not the cause of the Arab revolutions, and therefore bin Laden's death does not weaken the revolutionary fervor. If Libya's [Moammar] Gadhafi or [Syrian president Bashar al-Assad] were to depart the political scene, that would have significantly more relevance for the oil market than the bin Laden news.” British Embassy in Tripoli burned May 1. Apr 29 USD113.27 – The U.S. Bureau of Economic Analysis issued an advance estimate for 1Q11 US GDP +1.8% qoq Apr 28 USD112.26 – Federal Reserve Chairman Ben Bernanke announced that there

would be no QE3. Apr 27 USD112.91 – UK GDP grows by 0.5% qoq in 1Q11 – this UK narrowly avoids a double dip

recession. S&P cuts Japan’s ratings outlook to negative as sounds fresh alarm about

debt burden. Russia reports GDP growth of 4.5% qoq in 1Q11 Market anxieties that expensive fuel will stunt global economic growth “even overlooked the support from improving US consumer sentiment,” said Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston. “The US consumer confidence index increased to 65.4 from March’s 63.8 level while the economists were expecting that the index would rise to 64.5,” he said.

Apr 26 USD111.6 – G20 investigates agencies over oil price transparency - Oil price reporting agencies Platts and Argus are under scrutiny over their governance and transparency as part of a G20 investigation into commodity speculation. In a new update to the G20, officials from the International Organisation of Securities Commissions (IOSCO) said they will assess the "representativeness of the data provided by price reporting agencies" as well as "governance and conflict of interest management at price reporters." The study will also provide a "critique of the main methodologies" used when setting prices and "the degree of transparency provided by price reporting agencies". Apr 25 USD111.6 – Japan's government approved a ¥4 trillion supplementary budget, likely to be the first of several to help fund reconstruction—the budget will be submitted to the Diet on April 28 and is expected to be approved in early May. Expansion in US gross domestic product (GDP) is expected to have slowed to 1.8% in 1Q11 from the 3.1% seen in the final three months of 2010, according to Wall Street economists. Apr 22 USD – According to RGE, the MENA region seems to have settled into a new unstable stalemate: Government policies of force and extensive spending have helped dampen unrest across most of the region, but economic and

political pressures make the situation unsustainable in the medium term. President of Yemen tries to engineer his own exit.

The Role of Speculators in the Futures Markets Source: C.R. Weber, Oil & Gas Journal, and other industry publications

Summary - US politicians have struggled to evaluate the role of speculators in determining the movement of commodity prices. Obama’s inaugural address made it clear that he believes that left unchecked speculators with bring markets down. The following chronology plots recent discussions on the subject. Currently the politicians and Commodity Futures Trading Commission (CFTC) are singing from different hymn sheets Jun 21 - The US Federal Trade Commission will investigate whether crude oil and product price increases this spring resulted from possibly anticompetitive behavior, according to letters sent by FTC Chairman Jon Leibowitz to five US senators. Leibowitz cited US Energy Information Administration statistics in early May showing a 90% increase in US refiners’ margins since the beginning of the year, and

refineries running at 81.7% of capacity at the time, 7% less than a year earlier. The chairman told the senators that FTC would try to determine “whether certain oil producers, refiners, marketers, physical or financial traders, or others” acted in an anticompetitive manner or provided false or misleading information about wholesale crude or product prices to a federal department or agency. Areas of investigation may include utilization and maintenance decisions, inventory holding decisions, product supply decisions, product import and export strategies and volumes, product output decisions, capital planning decisions, product margins and profitability, and any other information which may be relevant in determining if federal laws were violated, the letter continued. Jun 10 – Oliver Jakob said, “The Brent premium to WTI has for us now reached a level of total irrelevance. We can buy the argument that Brent and WTI need now to be totally disconnected one vs. the other (i.e., the Brent-WTI spread should not be traded anymore) but if we then don’t focus on the Brent-WTI spread but purely on the flat price of Brent, our opinion is still that Brent is overbought on the basis of its spread values, its crack values, and the increased OPEC real flows. We fear that Brent futures are now falling into investment overdrive.” May 26 - The US Commodity Futures Trading Commission cited three companies and two traders with attempting to manipulate crude oil prices on the New York Mercantile Exchange. The group made more than USD50Mn of unlawful profits from the scheme from January through April 2008, CFTC officials said. The defendants allegedly bought large quantities of West Texas Intermediate crude to dominate and control already tight supplies at the Cushing, Okla., delivery point, according to the civil complaint. May 23 – The latest Commodity Futures Trading Commission report revealed money managers sharply cut their net length in crude by 13.1% to a level last seen prior to the Libyan civil war on both a futures and options combined basis. Patrick Zhang of Standard New York Securities Inc. commented, “Arguably, the reduction in the net-long position held by money managers and the recent decline in oil prices have effectively removed much of the ‘risk premium’ of the unrests in the Middle East and North Africa region. While the contagious risk to other major producers in the region has become subdued, Libyan supply remained largely shut in and unrest in Syria and Yemen is still heated. Commercial hedgers continued to reduce their net short positions, which have declined by 5% week-over-week. The decline is aligned with our expectation [for the] hedging flow to slow down. Swap dealers cut down their net short position by 10.5% week-over-week, which could be a profit-taking move from their record net short level reported 3 weeks ago.” May 18 - US Sen. Claire McCaskill (D-Mo.) asked Federal Trade Commission Chairman Jon Leibowitz to investigate reports that refiners are cutting back on gasoline stockpiles to keep gasoline prices high. She specifically cited a Kansas City Star article that said wholesale gasoline margins were climbing to levels not seen since Hurricane Katrina in 2005 because of Mississippi River flooding. Oliver Jakob commented May 11 - Olivier Jakob at Petromatrix, reiterated his earlier warning that US refiners eventually “will have to explain to all sorts of taskforces and other investigation committees why they are running at very low utilization rates May 9 – In the light of sharp falls in oil prices (due to EU action to weaken the Euro and resurfacing fears about the global economy, the US president asked his recently created task force against fraud in the oil market to report whether gasoline prices are falling in line with the big drop in oil prices, and if not, whether it is because of fraud or market manipulation. May 2 – As part of budget cuts, the US EIA announced that it would curtail efforts to understand linkages between physical energy markets and financial trading Apr 28 – Federal Reserve Chairman Ben Bernanke said the Fed can do nothing to lower high energy prices. Unlike President Barack Obama who has the Department of Justice searching for speculators he claims are driving up energy costs, Bernanke blamed rising prices on geopolitical threats to Middle East oil supplies and growing demand from developing countries. “The Fed can’t create more oil,” he said. However, OGJ point out that many blame the Fed’s “quantitative easing” economic stimulus program for reducing the value of the US dollar, the currency in which world oil and other commodities are traded, thus driving up prices. Bernanke did say he plans to end the QE program after completing the current second phase.

Apr 26 – G20 investigates agencies over oil price transparency - Oil price reporting agencies Platts and Argus are under scrutiny over their governance and transparency as part of a G20 investigation into commodity speculation. In a new update to the G20, officials from the International Organisation of Securities Commissions (IOSCO) said they will assess the "representativeness of the data provided by price reporting agencies" as well as "governance and conflict of interest management at price reporters." The study will also provide a "critique of the main methodologies" used when setting prices and "the degree of transparency provided by price reporting agencies". G20 investigates agencies over oil price transparency - Oil price reporting agencies Platts and Argus are under scrutiny over their governance and transparency as part of a G20 investigation into commodity speculation. In a new update to the G20, officials from the International Organisation of Securities Commissions (IOSCO) said they will assess the "representativeness of the data provided by price reporting agencies" as well as "governance and conflict of interest management at price reporters." The study will also provide a "critique of the main methodologies" used when setting prices and "the degree of transparency provided by price reporting agencies". Leaders from US President Barack Obama to France's President Sarkozy have expressed deep concern about the influence of speculation on oil spikes, since the price has soared to its highest level since before the crisis

New Crude Oil Production Capacity Coming on Stream Source: C.R. Weber, Oil & Gas Journal, and other industry publications Aug 17 – Petrobras started production of 18° gravity oil to the semisubmersible P-56 platform in the Campos Basin's Marlim Sul Module 3 off Brazil. The first production is from well 7-MLS-163HPRJS, which has a capacity to produce as much as 16,000 b/d. Jul 23 – US crude oil production fell to a 2-year low and showed year-over-year declines for the second month in a row, according to the latest monthly data from the American Petroleum Institute. June 30 - China National Petroleum Corp (CNPC) began operations of the first phase of Iraq’s Al-Ahdab oil field, according to Chinese official media. Al-Ahdab is expected to produce 25,000 b/d of oil in the first 3 years and 115,000 b/d in 6 years as stipulated in the USD3Bn contract signed with Iraq's Ministry of Oil in 2008. Jun 14 –Royal Dutch Shell PLC and Qatar Petroleum reported the Pearl gas-to-liquids plant in Qatar’s Ras Laffan Industrial City sold its first commercial shipment of GTL gas oil. The sale marked the start of production of GTL products from the plant. In coming months, production is to ramp up from the Pearl GTL project’s first train, and the second train is expected to start up before yearend. The plant is expected to reach full production capacity by mid-2012. It is the largest energy project ever launched in the Qatar, officials said. When fully operational, Pearl GTL is expected to produce 1.6 bcfd from North field, which will be processed to deliver an expected 120,000 b/d of condensate, LPG, and ethane, plus an expected 140,000 b/d GTL products using Shell's technological and project management capabilities. Jun 24 – According to Purvin & Gertz unconventional oil production from the Bakken, Eagle Ford, and Niobrara plays is expected to approach 900,000 b/d in 2015 and exceed 1.3Mnbd by 2020. It is estimated that current oil production from the oil shale plays is 350,000-400,000 b/d. Jun 16 – IEA estimates that OPEC’s spare production capacity will be 37.9Mnbd well above the current estimated call of 30.1Mnbd Jun 7 – BHP Billiton has started production from its Shenzi field in the Gulf of Mexico, thus becoming the first operator with new deepwater production since the moratorium imposed during the Macondo incident. The SB-201 well in Green Canyon block 653 was drilled to a measured TD of 25,126 ft (7,658 m) and produces approximately 17,000 b/d of oil. May 4 - Shell Canada Energy has started production from the Scotford upgrader expansion project near Edmonton, Canada. The 100,000 b/d expansion increases Scotford's bitumen upgrading capacity to 255,000 b/d.

Exploration and Development Source: C.R. Weber, Oil & Gas Journal, and other industry publications

Summary – Following the dramatic collapse of the oil price during mid 2008, E&D spending was severely impacted with even Saudi Aramco deciding to delay new E&D projects. In Feb 2009, it was reported that OPEC had delayed 35 of 150 planned oil drilling projects by at least 4 years. However, at the start of 2010 E&D spending is once again on the rise despite a much less inflated oil price than at the start of 2008. Deepwater drilling is considered the main future growth segment for this industry with Asia at the forefront led by Indonesia, Malaysia and India.

see John Kemp ft.com 24.11.08 Market already making adjustment to take account of changing supply demand balance to bring e&d costs down (e.g. rig hire rates falling – steel prices) with IEA having already cut its estimate for 2030 production by a staggering 10 million bpd (9 percent) since WEO2007 (when it thought 113.7 million would be needed by 2030).

Aug 18 – It is reported that Polyarnaya Zvezda and Severnoye Siyaniye semisubmersible drilling rigs being constructed in the Vyborg Shipbuilding Plant in northern Russia for operation in the Russian Arctic shelf are nearing completion. Aug 18 – Oil and wet gas plays of all types are revitalizing basins, reducing unemployment, stressing demand for rigs and other services, and reversing production declines in the US onshore Lower 48, speakers said Wednesday at a session leading up to the Summer NAPE exposition in Houston. Aug 17 – Exxon fights the US government for right to develop the Julia oil field, about 250 miles southwest of New Orleans, which may hold more than 700MnBbls of oil and gas equivalent. Exxon, which announced the discovery in June, wants to tap that field. But the Interior Department says Exxon's leases have expired and the company hasn't met requirements for an extension. Aug 16 – Statoil has established that the Aldous and Avaldsnes oil discoveries are part of a single structure which is one of the ten largest ever discovered in the Norwegian sector and the largest since the mid-1980s. The structure is estimated to contain between 0.5-1.2MnBbls. Aug 15 – According to Rockhopper Exploration, the Sea Lion main complex in the North Falkland basin could yield ultimate recovery of 325-434MnBls. Aug 4 – The US Bureau of Ocean Energy Management, Regulation, and Enforcement conditionally approved Shell Offshore Inc.’s revised exploration plan to drill up to four shallow-water wells in the Beaufort Sea beginning in July 2012. Shell acquired the leases in sales held in 2005 and 2007. Jul 29 – PDVSA signed a USD2Bn financing agreement with Eni SPA mainly for development of the two firms’ joint venture in the Orinoco heavy oil belt. Jul 25 - Petrobras has approved a 2011-2015 business plan that calls for spending of USD224.7Bn. This total reflects more exploration and production segment participation, going to 57%. New projects in E&P account for 87% of total new projects spending. About 95% of the total spending is to be in Brazil. The E&P segment spend will total USD127.5Bn, USD117.7Bn of which will be allocated to Brazil, 65% for production development, 18% for exploration, and 17% for infrastructure. The pre-salt areas will absorb 45% of the total E&P investment in Brazil and approximately 50% of the total amount allocated for the production development. The participation of the pre-salt in the total oil domestic production will increase from 2% in 2011 to 40.5% in 2020. Petrobras says it plans to drill 10 exploratory wells in the Transfer of Rights area, which will also see the start-up of the first extended well test in the Franco 1 block, followed by an FPSO with a production capacity of 150,000 boed in 2015. The company also plans to accelerate the Varredura project, which is designed to map exploratory opportunities in Campos basin carbonate reservoirs that can take advantage of existing infrastructure. To date, 284 prospects have been mapped in the Espírito Santo and Campos basins and the discoveries in these areas have already presented an estimate of recoverable volumes of at least 2,235MnBbls.

Jul 22 - Swift action to reduce the growing deepwater exploration plan backlog in the Gulf of Mexico and the approval pace for those plans and associated drilling permits would increase employment in almost every US state; boost tax and royalty revenue for federal, state, and local governments; and improve US energy security, a new study by IHS-CERA and IHS Global Insight concluded. Jul 13 – BP has successfully tested a deepwater well emergency capping stack offshore Angola. The device, developed with Subsea 7, Oceaneering, FMC, and Cameron, is a modified subsea assembly of valves, spools, and fittings used to control flow. The capping device would be landed onto the top of a BOP once the top part, known as the lower marine riser package, has been removed. Jul 12 - Consulting engineers have estimated a midrange of 636MnBbls of recoverable oil at Tawke field in the northern part of Iraqi Kurdistan. Field operator DNO International ASA said the estimate is more than double and yearend 2010 estimate of 306MnBbls and far exceeds company expectations of even a few months ago. The new figure certainly was not envisaged when the company made the Tawke discovery in 2006, DNO said. Jul 11 – It is reported that Iran plans to invest USD18Bn by 2015 to boost output in the south and that it expects the Yadavaran field to start production in a few months. Most of the planned investment will be met by Iran, according to Deputy Oil Minister Mohsen Khojasteh Mehr, who said USD3Bn will be spent by March 2012 on projects in the southern region. "Many plans are being implemented to accelerate development of shared oil and gas fields while the ministry aims to increase oil production in the oil rich region of the south to 3Mnbd," Khojasteh Mehr said. Yadavaran oil field, under development by Iran's National Oil Co. and China's SinOPEC, will begin production this fall with 20,000 b/d and will reach 85,000 b/d over the next 2 years, Khojasteh Mehr said. Jul 11 - Alberta's bitumen production may more than double to 3.5Mnbd by 2020, up from 1.6Mnbd in 2010, according to a recent report by Alberta's Energy Resources Conservation Board (ERCB). Reserves are estimated at 169BnBbls Jul 8 – Russian and Norwegian seismic contractors will shoot 7,700 km of multiclient 2D seismic in Arctic seas off northern Russia beginning in August. The M/V Akademik Fersman will shoot 4,500 km in the Laptev Sea starting in August, then move to acquire a further 3,200 km in the East Siberian Sea by the end of 2011. The survey is a partnership between TGS-NOPEC Geophysical Co. and Dalmornefte Geophysica Yuzhno-Sakhalinsk (DMNG) under a 2D cooperation agreement made public in January 2011. Jul 5 – Having knocked the North Sea market into a spin with a windfall tax, the UK government tried to reenergise the market by offering new entrants to the UK Continental Shelf received a tax incentive through an increased a tax allowance for marginal fields. Jun 30 – BG Group said its presalt holdings in the Santos basin off Brazil contain a net potential of 6BnBbls of oil equivalent mean total reserves and resources, double the group’s early 2010 best estimate. The company estimated a 90% chance that its interests contain at least 4BnBoe and a 10% chance they could hold as much as 8BnBoe net. Jun 28 - Repsol SinOPEC, Statoil, and Petroleo Brasileiro SA (Petrobras) have made an ultradeepwater, light oil discovery in the Campos basin presalt area off Brazil. The companies said they had informed Brazilian authorities of the existence of traces of hydrocarbons in one formation in March and a second level in April. They didn't disclose the extent or other details of the apparent discovery of good-quality oil in the 1-REPF-11A-RJS well, informally known as Gavea. However, they called the discovery "the most significant made in the presalt area of the Campos basin." Jun 27 - An appraisal well at Sea Lion field in the North Falkland basin has produced oil at commercially viable rates, said Rockhopper Exploration PLC. Jun 20 - Alliance Oil Co. Ltd., Moscow, and Repsol of Spain will form an exploration and production joint venture in the Russian Federation. Alliance will hold a 51% stake in the venture and contribute producing assets in the Volga-Urals Region. Repsol will own 49% and make an initial cash investment to finance future growth.The companies said the deal will combine Alliance’s knowledge and privileged access to Russian exploration and production business opportunities with Repsol’s knowhow and technical capabilities to create a long-term exploration and production alliance. Jun 16 – Linc Energy Ltd., Brisbane, has acquired a controlling interest in giant Umiat oil field in the National Petroleum Reserve-Alaska and plans to develop Umiat to produce more than 50,000 b/d via a connecting conduit to the trans-Alaska oil pipeline. Jun 9 – Seismic acquisition can go ahead in the eastern part of the Barents Sea from July 7, according to the Norwegian Petroleum Directorate (NPD). The formalities concerning Norway and Russia’s Treaty on Maritime Delimitation and Cooperation in the Barents Sea and Arctic Ocean have been completed, allowing the survey to start as planned within the ensuing 30 days. NPD will be responsible for seismic acquisition on behalf of the Norwegian authorities, with PGS’ Harrier Explorer performing the work. Jun 9 – Sonde Resources Corp., attributed “giant” status to the Zarat oil and gas field on the 768,000-acre 7th of November block shared by Libya and Tunisia in 80-120 m of water in the Mediterranean. It is estimated that the field contains 362MnBbls of original oil and condensate in place plus 981 bcf of gas, 50% carbon dioxide, in its southern and central portions. The northern portion of the field was not assessed. Of these amounts, 207 million bbl and 471 bcf in place are attributed to the 7th of November block.

Jun 8 – Both Shell and Exxon Mobil reported big steps in the Gulf of Mexico post-Macondo. Shell has decided to go ahead with development at Cardamom field, and Exxon Mobil has reported major drilling success in finding oil in Keathley Canyon. Oil giant ExxonMobil has discovered a major reserve deep below the Gulf of Mexico. Less than two months after President Obama relaxed restrictions imposed in the wake of the Deepwater Horizon disaster in April 2010, the company has found 700 Mn barrels of oil - the biggest discovery in the area for 12 years - 7,000 feet below the bottom of the gulf. President Obama’s critics, who want him to take the regulatory shackles off the industry despite environmental fears, say the find vindicates their argument. The right wing Heritage Foundation commented: “One can only wonder how much oil production was sacrificed as a result of the moratorium and the Obama administration's subsequent delays.” Jun 1 – Iran’s oil production could fall by 1Mnbd (27%) over the next 5 years due to lack of investment in the country’s energy sector, according to Mohsen Khojasteh-Mehr, deputy oil minister for planning. He estimated that production may fall to 2.7Mnbd from the current 3.7Mnbd unless USD150Bnis invested in the energy sector. May 26 – In a poll by KPMG, 35% of energy executive said their companies would increase spending on alternative energy R&D projects in 2011. Executives surveyed also said their companies will increase overall investment, forecasting capital spending will increase in 2011 compared with 2010. About 33% expect to boost capital spending by more than 10%, 17% forecast an increase of 5-10%, and 17% forecast an increase of up to 5%. May 20 - The US Bureau of Ocean Energy Management, Regulation, and Enforcement released a revised draft supplemental environmental impact statement (SEIS) for Chukchi Sea Lease Sale 193. The revised draft SEIS addresses concerns a federal court in Alaska raised when it remanded the February 2008 sale back to the agency on July 21, 2010. May 10 - BP PLC said Azerbaijan’s parliament ratified the production sharing agreement between BP and State Oil Co. of Azerbaijan Republic (SOCAR) on joint exploration and development of the Shafag-Asiman deepwater structure in the Caspian Sea off Azerbaijan. May 6 - Total subsidiary TEPA (Block 17/06) Ltd. and Sociedade Nacional de Combustiveis de Angola (Sonangol) report a hydrocarbon discovery in the northeast portion of deep offshore block 17/06. Water depth is 445 m (1,460 ft) at the Canna-1 well which tested at more than 5,000 b/d of 33° API oil from a Miocene reservoir. May 5 – Oil & Gas UK claims there has been a sharp drop in confidence throughout the UK upstream oil and gas industry in the first quarter of 2011. The association’s quarterly business index says this reflects the impact of the recent increase in supplementary tax from 20% -30% which the UK government imposed on North Sea oil production. May 4 - Governors from four US coastal states said they are forming the Outer Continental Shelf Governor’s Coalition, a group whose goal will be “to promote a constructive dialogue among the coastal state governors and the federal government” about the responsible development of energy resources offshore. The coalition’s mission was described in an open letter of invitation to governors from other coastal states sent by Gov. Bobby Jindal (La.), Gov. Rick Perry (Tex.), Gov. Haley Barbour (Miss.), and Gov. Sean Parnell (Alas.). May 4 - The state of Alaska is putting final touches on a plan to attract investment in order to restore trans-Alaska oil pipeline throughput to 1Mnbd within 10 years. Alaska’s North Slope is still considered sparsely explored, said Daniel S. Sullivan, commissioner of the state Department of Natural Resources. The trans-Alaska oil pipeline has shipped more than 16Bnbbls since 1977, but the ANS and adjacent offshore areas are still lightly drilled. May 3 –ExxonMobil Canada Properties filed a development plan with Newfoundland and Labrador authorities in mid-April to develop Hebron oil field in the Atlantic off eastern Canada. Forecasted cumulative recovery over 30 years is estimated at 660-1,055MnBbls of oil. Apr 14 –BP PLC and OAO Rosneft extended until May 15 an Apr. 14 deadline for completing an Arctic exploration and stock-swap agreement while BP continues working with a Swedish arbitration panel. Apr 12 –Statoil submitted a 4.2 Bn kroner plan to the Norwegian Ministry of Petroleum and Energy for the development and operation for Vigdis North-East in the Tampen area of the North Sea. The company expects to start production from the field in December 2012 and expects to recover about 33 million boe from a fluvial sandstone reservoir in the Early Jurassic Statfjord formation.

Refinery Projects Source: C.R. Weber, Oil & Gas Journal, and other industry publications Summary - The dramatic collapse of the oil price during mid 2008 is starting to have a significant impact on refinery projects in future months. Most telling is Saudi Aramco’s decision to delay new refinery projects. Instead of building new refineries certain leading national oil companies have refocused on acquiring stakes in existing refineries Aug 12 – The 300,000 b/d Paradip refinery to be operated by state-owned Indian Oil Corp. at Paradip, Orissa, on India’s eastern coast is expected to be completed ahead of schedule in 1Q12

Aug 12 – A financial company based in Abu Dhabi has acquired a 75% interest in a 40,000-b/d refinery in Djibouti and plans to expand capacity to 100,000 b/d. Jul 29 – Tajikistan’s President Emomali Rahmon launched construction of the country’s first refinery, a 2,000-b/d facility in the town of Tursunzoda about 40 km west of the capital, Dushanbe. Jul 26 - As part of a strategy announced last year to exit the refining business, Murphy Oil Corp. has entered an agreement to sell its 33,250-b/cd refinery at Superior, Wisc., to Calumet Specialty Products Partners, Indianapolis. Jul 13 – The OGJ reported that according to the IEA in its July Oil Market report - following a slowdown in refining capacity investments this year, next year will see a slew of refinery projects completed. IEA finds that as much of 2.4 Mnbd of crude distillation capacity will be added worldwide during 2012. Most of this investment will occur in developing Asian countries. China will add 586,000 b/d of crude distillation capacity next year, or 25% of the world’s total additions. Global distillation capacity additions of only 412,000 b/d this year have provided some respite for refiners, the agency said. With annual worldwide oil demand growth forecast at 1.2 Mnbd, surplus refining capacity should shrink and result in better margins for refiners. OECD capacity changes North America will add 550,000 b/d of crude distillation capacity in 2012 following this year’s 95,000 b/d contraction. Member countries of the Organization of Economic Cooperation and Development (OECD) posted 3 years of net capacity reductions, but 2012 will reverse that trend, IEA said. Mexico’s 150,000 b/d expansion at Minatitlan is expected to come on line next year, and Motiva’s 325,000 b/d expansion at Port Arthur will make it the largest refinery in the US and one of the top 10 in the world. IEA forecasts that OECD Pacific countries will combine for a 100,000 b/d increase in crude distillation capacity next year. No change is expected in OECD Europe next year following this year’s 240,000 b/d decline in capacity. So far only Royal Dutch Shell PLC’s Harburg refinery in Germany and its Clyde refinery in Australia are the only 2012 closures included in IEA’s analysis. Non-OECD capacities This year’s non-OECD capacity additions are dominated by India, which IEA says will account for 400,000 b/d. Key projects in India include the expected commissioning of Bharat Oman’s 120,000 b/d Bina refinery and HPCL-Mittal Energy Ltd.’s 180,000 b/d refinery in the third quarter, plus an 80,000 b/d expansion of Essar’s Vadinar refinery in the fourth quarter. In China, only small expansion projects will be completed this year following several years of substantial capacity growth, but China National Petroleum Corp. participated in Chad’s first refinery, which is outside N’Djamena and started up this month with 20,000 b/d of capacity, IEA said. The agency’s figures show that desulfurization capacity additions in China next year will total 424,000 b/d, up from this year’s 136,000 b/d in added capacity. In the Middle East next year, crude distillation capacity growth will slow to 124,000 b/d from this year’s 165,000 b/d, but desulfurization projects will surge with the addition of 366,000 b/d of capacity vs. this year’s 123,000 b/d of added capacity. Jul 1 - Kuwait’s Oil Minister Mohammad al-Busairy said the Supreme Petroleum Council (SPC), the country’s highest decision-making body for oil policy, has approved construction of the 615,000 b/d Al-Zour refinery. Al-Busairy said SPC also approved proposals to upgrade two of Kuwait’s three existing refineries—the 466,000 b/d Mina Al-Ahmadi and the 270,000 b/d Mina Abdulla. Development of the Al-Zour refinery is expected to comprise two phases. During Phase 1, the facility will process 300,000 b/d of crude for the domestic market. Under Phase 2, it will process a further 315,000 b/d of oil. Ultimately, the refinery’s second phase will replace the distillation input of the country’s 200,000 b/d Shuaiba facility, which is Kuwait’s oldest and smallest refinery and is planned for closure. Kuwait may seek private investors to help build the new refinery after a government council revived the USD14.5Bn project, which stalled 2 years ago amid political opposition. Jun 23 - Global refinery runs recovered in 2010, but early 2011 margins well below the past decade’s sometimes heady levels suggest excess capacity will exist and margins will stay low for another 5 years according to the IEA. The IEA’s midterm oil and gas outlook, released June 16, forecasts 9.6 Mnbd of crude distillation capacity increases during 2010-16, largely in China and India, said David Fyfe, head of IEA’s oil industry and market division. Further capacity additions will include 6.6 Mnbd for upgrading and 7.3 Mnbd for desulfurization, he said during a seminar at the Center for Strategic & International Studies. “For margins to improve, about 4 Mnbd of refining capacity would have to close by 2016, which is unlikely because national oil companies are snapping up and modernizing older plants, especially in Europe,” Fyfe said. Refiners also are feeling competition from growing use of natural gas liquids and biofuels, which bypass refining altogether, he added. He would not comment on Federal Trade Commission Chairman John Leibowitz’s June 20 announcement that the US government agency will investigate whether oil and product price increases this spring resulted from possibly anticompetitive behavior. But Fyfe said refiners in consuming countries worldwide apparently have simply responded to weaker markets. “Our view would be that economic signals have kept throughputs low overall and margins depressed,” he said. “We do expect throughputs to pick up from June onward, as they normally do.” Jun 6 – Shell has preliminary plans to build a large ethylene plant in the Appalachian region of the US based on ethane from natural gas produced from the Marcellus shale. May 24 - Iran’s President Ahmadinejad, visiting the Abadan, visiting the Abadan refinery to underscore his nation’s ability to defy international sanctions, survived an explosion and fire at the facility that left 2 other people dead and 22 injured. "This incident was not an act of intentional sabotage," said Hamid-Reza Katouzian, head of Iran's parliamentary energy committee. "Experts had forewarned that Abadan refinery was not ready to be inaugurated." May 12 – Saudi Aramco said it has started producing ultralow-sulfur diesel (ULSD) from its 550,000-b/d Ras Tanura refinery in an effort to comply with higher environmental standards. Aramco said the facility’s diesel hydrotreater unit has a capacity to produce 105,000 b/d of ULSD, which contains less than 10 ppm of sulfur. The facility also contains a 200 ton/day sulfur recovery unit. Aramco last year launched a project to increase ULSD production at its 305,000-b/d Jubail refinery, which it owns with Royal Dutch Shell PLC. In 2013, Aramco plans to complete another ULSD project at its 400,000-b/d Yanbu refinery, which it owns with ExxonMobil Corp.

Apr 21 - Shell Australia said it may convert its Clyde refinery in Sydney into a fuel import terminal since it can no longer compete with megarefineries in India and South Korea that produce more at lower cost. This means Australia would be forced to obtain from overseas the 10% of its refined products that Clyde currently provides. Clyde produces 75,000 b/d and has been operating for more than a century. About 85% of the crude required to meet the product mix in Australia was imported from Asia in 2008-09 and about 15% from the Middle East.

Oil Industry Rationalisation Source: C.R. Weber, Oil & Gas Journal, and other industry publications Jul 20 – A unit of CNOOC Ltd. will pay USD2.1 billion for Canadian oil sands producer OPTI Canada Inc., Calgary, which filed on July 13 for creditor protection under Canada’s Companies’ Creditors Arrangement Act. Jul 14 – ConocoPhillips plans to separate its upstream and downstream businesses into two stand-alone, publicly traded corporations via a tax-free spinoff of the refining and marketing business to ConocoPhillips shareholders. The resulting exploration and production company will focus on oil and gas worldwide while the downstream company will focus on refining and marketing, primarily in the US although ConocoPhillips has some downstream operations abroad. Jul 1 - Marathon Oil Corp. completed the spinoff of the downstream business, Marathon Petroleum Corp., making Marathon Oil an independent upstream company based in Houston. Jun 10 – An ExxonMobil Corp. subsidiary’s USD1.69Bn acquisition of two private companies with Marcellus shale assets deepens the major’s commitment to unconventional resource development. May 25 - Saudi Aramco, the world’s biggest oil company in terms of oil reserves and production, is discussing a strategy to extend its operations into more than 50 countries in the next 10-20 years. “We want to transform Saudi Aramco from a leading oil and gas company into a fully integrated, truly global energy and chemicals enterprise with extensive operations in the kingdom and around the globe,” said Aramco President and Chief Executive Officer Khalid A. Al-Falih in an interview posted on the company’s web site. May 6 –BP PLC announced that Russia’s OAO Rosneft has become its new 50% partner in the German refining joint venture, Ruhr Oel GMBH, following the departure of former partner Petroleos de Venezuela SA. Under the Ruhr Oel agreement, which became effective from May 1, both companies co-own the following assets: Gelsenkirchen refinery (100% Ruhr Oel); PCK Schwedt refinery (37.5% Ruhr Oel share); Bayernoil refinery (25% Ruhr Oel share); and MiRO refinery (24% Ruhr Oel share). The Ruhr Oel announcement coincided with reports that an arbitration panel issued a consent order permitting BP and its existing partners—four billionaires known as the Alfa-Access-Renova (AAR) consortium—to assign the so-called Arctic opportunity to TNK-BP, subject to consent by Rosneft. May 2 - Total SA has agreed to take a majority stake in San Jose, Calif.-based SunPower for about USD1.38Bn, an investment described as one of the largest ever by an oil company in renewable energy. Apr 15 - Oklahoma City independent Chesapeake Energy Corp. has entered into a definitive agreement with Bronco Drilling Co. Inc. to acquire the Edmond, Okla.-based drilling contractor in a deal worth USD315Mn, including debt, net working capital, and outstanding warrants. Mar 25 – A January Arctic exploration and stock-swap agreement, described by parties Rosneft and BP as “historic,” has encountered trouble in a Swedish arbitration panel. The panel blocked the USD8 billion deal in a ruling that upheld a challenge by the Alfa-Access-Renova (AAR) consortium, BP’s Russian partner in TNK-BP.

Shipping News Source: C.R. Weber, and other industry publications Sep 6 – DHT Seeks Fresh Funds - DHT Maritime has filed a registration statement with the US SEC to sell from time to time common stock, preferred stock and debt securities in one or more offerings up to a total amount of USD 300Mn. Sep 1 - D/S Torm Completes LR1 Pool Strategy - D/S Torm has now completed the company’s LR1 pool strategy in accordance with the overall business strategy “Changing Trim.” Torm pioneered the formation of pools in 1990, and the concept has been very successful for years. Aug 22 - Genmar Receives Notice of Non-Compliance From NYSE - Genmar has announced that it has received notice from the NYSE that the company is no longer in compliance with the NYSE's continued listing standards. Aug 19 - Ocean Tankers Clarifies Reports Regarding Vessel Arrests - Ocean Tankers has announced that recent reports in the press of allegations for the arrest of tankers by Lukoil for an alleged non-payment of fuel bills to Lukoil are not true Aug 11 - TEN Announces Share Repurchase Program - Tsakos Energy Navigation has announced that its board of directors has authorized a new share repurchase program on the company's common shares allocating up to USD 20Mn for purchases in the open market and in other transactions.

Aug 5 – DHT Holdings Withdraws Offer For Saga Tankers - DHT Holdings has announced that it has withdrawn the voluntary exchange offer for all of the issued and outstanding shares of Saga Tankers. Following the expiry of the extended offer period DHT received acceptances for approximately 73Mn shares. Aug 3 – Omega Navigaiton Obtains Additional Requested Relief From US Court - Omega Navigation Enterprises has announced that, in connection with its Chapter 11 proceedings in Houston, Texas, the court has granted all of the additional relief that Omega requested. Jul 29 – Kyoei Tanker Warns of 1H11 Loss - It is reported that Kyoei Tanker expects a 1H11 loss of JPY 90Mn against a previously anticipated profit of JPY 130Mn. The company gave no explanation for the revised expectations. Jul 27 - d'Amico Int'l Shipping Enters Into New Loan Facility - d’Amico Int'l Shipping has announced that its operating subsidiary d’Amico Tankers Limited - Ireland has signed a term loan facility of USD 48Mn with a club deal between Credit Agricole Corporate and Investment Bank and DnB NOR Bank. Jul 27 - Capital Product Partners Announces Cash Distribution - Capital Product Partners has announced that its board of directors has declared a cash distribution of USD 0.2325 per unit for 2Q11 ended June 30, 2011, payable on August 15, 2011 to unit holders of record on August 4, 2011 Jul 21 - DHT Holdings Extends Offer Period for Saga Tankers - Following DHT Holdings' voluntary exchange offer for all of the issued and outstanding Saga Tanker shares, the company has announced that it has received acceptances for approximately 73Mn shares equaling 84% of Saga Tankers' total share capital. Jul 14 - Omega Navigation Obtains Requested Relief From US Court - Omega Navigation Enterprises has announced that, in connection with its Chapter 11 proceedings in Houston, Texas, the court has granted all of the interim relief that Omega requested. Jul 14 - Genmar Announces Reduction in Minimum Cash Balance Covenant - Genmar has amended its USD 550Mn revolving credit facility, dated as of May 6, 2011, and its USD 372Mn senior secured credit facility, dated as of May 6, 2011, each with Nordea Bank Finland and DnB NOR Bank as the lead arrangers of the facilities. Jul 13 - Scorpio Tankers Amends 2010 Credit Facility & Agrees to TC-In Two Vessels - Scorpio Tankers has announced that it has amended its 2010 credit facility converting it to a reducing revolving credit facility from a term loan and that it has agreed to time charter-in two vessels. Jul 8 – Omega Navigation Enterprises and Certain Subsidiaries File for Reorganization Relief Under Chapter 11; Omega To Continue To Operate in the Ordinary Course of Business Jul 8 - Concordia Maritime Launches App - Concordia Maritime has launched a new smartphone app which the company says is a shortcut to information about its share price, financial performance, fleet and more. The app can be downloaded free of charge to smartphones. Jul 6 - Genmar's Seven VLCCs Enter Commercial Pool Managed by Heidmar - Genmar has announced that it has agreed to enter seven of its VLCCs into Seawolf Tankers, a commercial pool of VLCCs managed by Heidmar Inc. Jul 5 - Teekay Corp Declares Dividend - Teekay Corp has announced that its board of directors has declared a cash dividend on its common stock of USD 0.31625 per share, payable on July 29, 2011 to all shareholders of record as at July 15, 2011. Jun 28 - D/S Torm Announces Medium Term Bank Funding - D/S Torm has in line with its strategy followed a plan for strengthening the financial position of the company. As part of this plan USD 630Mn will now be made available for the company in the medium term. Jun 27 - Knightsbridge Files With SEC - Knightsbridge Tankers has filed a registration document with the US SEC to offer up to USD 200Mn of the company's common shares, preferred shares, debt securities, warrants, purchase contracts and units. Jun 23 - Top Ships Announces Reverse Stock Split - Top Ships has announced that its board of directors has determined to effect a 1-for-10 reverse stock split of the company’s common stock. Jun 23 - Euronav Announces New USD 750Mn Facility - The executive committee of Euronav has announced that it has signed a new USD 750Mn forward start senior secured credit facility led by Nordea Bank Norge and DnB Nor Bank acting as lead arranger and bookrunners. Jun 9 - Kayne Anderson Increases Stake of Crude Carriers Corp - Los Angeles-based investment firm Kayne Anderson has increased its stake in Crude Carriers Corp to 5.23% and now owns 726,570 of the company's shares. This comes just a week after it was revealed Kayne had raised its stake in Teekay Tankers to 14.35% Jun 1 - D/S Torm Announces Sale and Leaseback Agreement for Product Tanker - D/S Torm has entered into a sale and leaseback agreement for the product tanker Torm Margrethe. The vessel has been sold for a total consideration of USD 46Mn. The transaction will be treated as a sale with an accounting profit of USD 8Mn. This action could be considered as a measure designed to repair its balance sheet – the preoccupation of nearly all shipping companies after the asset crash following the onset of the Great Recession.

May 31 - DHT Holdings To Acquire Saga Tankers - DHT Holdings has announced that it will offer to acquire all of the shares of Oslo Axess listed Saga Tankers. The board of directors of Saga has agreed to recommend the DHT offer to its shareholders. May 29 – OSG Announces Closing of Forward Start Unsecured Revolving Credit Agreement - OSG has announced it has entered into a USD 900Mn unsecured forward start revolving credit agreement that matures on December 31, 2016. May 25 – Shipping companies hit by US sanctions. The US says Ofer Bros., along with Tanker Pacific of Singapore, sold a tanker valued at USD8.65Mn to the Islamic Republic of Iran Shipping Lines (IRISL). Other companies hit by sanctions for trading with Iran include PDVSA, PCCI, Speedy Ship, and Associated Shipbroking of Monaco. May 23 - Omega Navigation Amends Loan Maturity Dates - Omega Navigation Enterprises has reached a further agreement with its lenders to amend the maturity date of both the current senior and junior loan facilities. The new maturity date will be June 9, 2011 on both facilities, amended from May 20, 2011. May 19 - Buana Listya Tama IPO Over-Subscribed - Berlian Laju Tanker subsidiary, Buana Listya Tama, has seen its IPO over-subscribed 16.77 times with institutional investors taking 91.07% of the offering of IDR 6.65Bn shares. The company is to list in Indonesia on 23 May. May 19 - Scorpio Tankers Announces Closing of Follow-On Public Offering - Scorpio Tankers has closed its sale of 6Mn shares of common stock from its follow-on public offering and also closed on the underwriters' over-allotment option to purchase 900,000 additional common shares at the offering price of USD 10.50 per share. Apr 14 – Torm prepares fully underwritten rights issue - Torm plans to raise approximately USD100Mn of new share capital through a fully underwritten discounted rights issue. The rights issue is expected to be launched in 2H11, although not before the publication of 1H11 results on Aug 18

IMO Environment Issues Source: Marine Environment Protection Committee (MEPC) of the International Maritime Organisation (IMO) Mandatory energy efficiency measures for international shipping adopted at IMO environment meeting Marine Environment Protection Committee (MEPC) – 62nd session: 11 to 15 July 2011 Briefing: 42, July 15, 2011 Mandatory measures to reduce emissions of greenhouse gases (GHGs) from international shipping were adopted by Parties to MARPOL Annex VI represented in the Marine Environment Protection Committee (MEPC) of the International Maritime Organization (IMO), when it met for its 62nd session from 11 to 15 July 2011 at IMO Headquarters in London, representing the first ever mandatory global greenhouse gas reduction regime for an international industry sector. The amendments to MARPOL Annex VI Regulations for the prevention of air pollution from ships, add a new chapter 4 to Annex VI on Regulations on energy efficiency for ships to make mandatory the Energy Efficiency Design Index (EEDI), for new ships, and the Ship Energy Efficiency Management Plan (SEEMP) for all ships. Other amendments to Annex VI add new definitions and the requirements for survey and certification, including the format for the International Energy Efficiency Certificate. The regulations apply to all ships of 400 gross tonnage and above and are expected to enter into force on 1 January 2013. However, under regulation 19, the Administration may waive the requirement for new ships of 400 gross tonnage and above from complying with the EEDI requirements. This waiver may not be applied to ships above 400 gross tonnage for which the building contract is placed four years after the entry into force date of chapter 4; the keel of which is laid or which is at a similar stage of construction four years and six months after the entry into force; the delivery of which is after six years and six months after the entry into force; or in cases of the major conversion of a new or existing ship, four years after the entry into force date. The EEDI is a non-prescriptive, performance-based mechanism that leaves the choice of technologies to use in a specific ship design to the industry. As long as the required energy-efficiency level is attained, ship designers and builders would be free to use the most cost-efficient solutions for the ship to comply with the regulations. The SEEMP establishes a mechanism for operators to improve the energy efficiency of ships. Promotion of technical co-operation The new chapter includes a regulation on Promotion of technical co-operation and transfer of technology relating to the improvement of energy efficiency of ships, which requires Administrations, in co-operation with IMO and other international bodies, to promote and provide, as appropriate, support directly or through IMO to States, especially developing States, that request technical assistance.

It also requires the Administration of a Party to co-operate actively with other Parties, subject to its national laws, regulations and policies, to promote the development and transfer of technology and exchange of information to States, which request technical assistance, particularly developing States, in respect of the implementation of measures to fulfil the requirements of Chapter 4. Work plan agreed The MEPC agreed a work plan to continue the work on energy efficiency measures for ships, to include the development of the EEDI framework for ship types and sizes, and propulsion systems, not covered by the current EEDI requirements and the development of EEDI and SEEMP-related guidelines. The MEPC agreed to the terms of reference for an intersessional working group on energy efficiency measures for ships, scheduled to take place in February/March 2012, tasked with: • further improving, with a view to finalization at MEPC 63, draft Guidelines on the method of calculation of the EEDI for new ships; draft Guidelines for the development of a SEEMP; draft Guidelines on Survey and Certification of the EEDI; and draft interim Guidelines for determining minimum propulsion power and speed to enable safe manoeuvring in adverse weather conditions; • considering the development of EEDI frameworks for other ship types and propulsion systems not covered by the draft Guidelines on the method of calculation of the EEDI for new ships; • identifying the necessity of other guidelines or supporting documents for technical and operational measures; • considering the EEDI reduction rates for larger tankers and bulk carriers; and • considering the improvement of the guidelines on the Ship Energy Efficiency Operational Indicator (EEOI) (MEPC.1/Circ.684). Secretary-General Efthimios E. Mitropoulos satisfaction Commenting at the close of the session, on the outcome of MEPC, IMO Secretary-General Efthimios E. Mitropoulos expressed satisfaction at the many and various significant achievements with which the session should be credited. “Although not by consensus – which of course would be the ideal outcome – the Committee has now adopted amendments to MARPOL Annex VI introducing mandatory technical and operational measures for the energy efficiency of ships. Let us hope that the work to follow on these issues will enable all Members to join in, so that the service to the environment, the measures aim at least will be complete,” he said.