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Tanker Demand Forecast

Maritime Activity Reports, Inc.

March 7, 2005

McQuilling Services has recently published its bi-annual Tanker Market Outlook which forecasts freight rates for all tanker sectors on the main routes through 2008.

Tanker Demand

The demand for tankers is a derived demand, being driven by the demand for oil where the latter is directly related to the level of regional and global economic activity. Oil is expected to remain the dominant energy source for the world through 2025 and overall demand growth has been projected by the U.S. Energy Information Adminstration (EIA) to average 1.8% per annum over this period. As China and India continue to develop they are expected to be the main leaders of oil demand growth. OPEC have in fact recently increased their consumption expectations for China for 2005 from 6.5 million to 7 million bbls per day as demand in the fourth quarter of 2004 was higher than expected.

There are many other factors affecting tonnage demand but the distance over which cargo is transported is of particular significance. There is a greater requirement for tankers carrying the same amount of cargo over longer distances than shorter distances. To illustrate this using an historical perspective, one only needs to consider the effect on the shipping markets caused by the closure of the Suez Canal in the 1950s and 1960s. On the occasions that this happened, the average voyage length from the Arabian Gulf to Europe increased from 6,000 to 11,000 miles, thereby significantly increasing ship demand and contributing to freight market booms on each occasion.

We maintain global trade matrices to accommodate for the distance component of tonnage demand. As long as the relative volumes of cargo moving on the various trades remain in approximately the same proportion to one another, overall tanker demand is relatively easy to determine. We calculated that 164 VLCCs were required in 2004 to trade between the Middle East and Far East, forty-five percent of the overall 368 vessel demand for VLCCs in 2004 (Figure 1). We also looked at the tanker demand effect of a +/- 1 million barrel per day change in OPEC export volumes, summarized in Table 1. These results were obtained by transforming the volume change through the global trade matrix into equivalent vessels.

Tanker Supply

It is most important to differentiate between the various tanker sectors, especially when evaluating the supply of vessels. These sectors all have substantially different absolute inventory levels of trading tankers. Each sector has an orderbook and mandated exit profile (based on IMO 13G) that is specific to the sector, resulting in very different average trading fleet inventories year on year. Additionally, availability and utilization factors (see Table 2) further adjust the supply of tankers able to meet tanker demand in these sectors.

Tanker Supply & Demand

Crude oil marine transport demand growth is historically greater than average global oil demand growth. We project annual demand growth for large tankers at slightly over 2% for the foreseeable future. For Medium Range tankers we use the smaller growth rate of 1.8% corresponding to overall world oil demand as product transport demand in this sector is much more highly distributed than crude transport demand in the larger tanker sectors.

Beginning with the starting inventory of trading tankers in each sector (as at 1 Jan 05), we adjust levels based on net forecasted additions and deletions and calculate average annual sector inventories through 2010. From these levels we deduct for availability and utilization factors to arrive at the average net trading inventory on a yearly basis. Subtracting our estimated tanker demand levels from net tonnage supply yields a surplus or deficit result which is illustrated in Figure 2 on a normalized basis for each tanker sector. Applying this systematic approach across sectors clearly illustrates the substantially different configurations of supply and demand existent in each. It also demonstrates why we feel the VLCC sector to be currently supply challenged. We continue to believe that the strongest evaluations of the tanker marketplace are those that recognize and highlight these differences.

Of course, in addition to fundamentals, this market is also influenced by perception and world events. In our Tanker Market Outlook, we consider a variety of quantitative and qualitative factors in establishing a view of the future spot freight market for tankers. The Tanker Market Outlook 2005-2008 can be ordered from our website, www.mcquilling.com.

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