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Charles R. Weber Company Tanker Report May 2011

Contents

Executive Summary The Year So Far 2011 The Shipping Market ­ Chart Wall | `Great Recession' ­ Civil unrest and earthquake fail to knock recovery off course | World Economic Action ­ G20 ­ Still sticking together despite pressure on US | The Impact of the Japanese Earthquake | Unrest in the North Africa/Middle East Region The Outlook for 2011 - Broad Brush Background ­ The big themes | US debt and global commodity price rises the next obstacles on the road to recovery | Peak Oil ­ Sweet not sour becomes the issue | Brent to replace WTI as the global benchmark? Potential Drivers for Tanker Market in 2011 - China ­ Monitoring the Health of the World's Second Largest Economy Tanker Market Outlook for 2011 - Tanker Supply Prospects | Slippage Update | Freight Market Scenarios Calendar of Events 2011/12 Future Vision ­ Shipping | Oil Industry ­ Liquid Natural Gas in the spotlight Listed Tanker Companies - Tanker Shares Stuck in the Slow Lane | Analysis of 4Q10 Listed Tanker Company Results

Appendices

Chronology of Oil Market Events January-April 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 | What a Democratic Presidency Means for US Energy Policy | Oil Industry Rationalisation | Shipping News

Charles Weber Tanker Report Charles R. Weber Company Inc. Tanker Report is published four times a 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 in fleet supply and demand. Sources CRW Weber 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 Market 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:[email protected]

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 [email protected] 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: [email protected] Website: www.crweber.com Mail & Visiting Address Charles R. Weber Company Inc. Greenwich Office Park One Greenwich, CT 06831, USA

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Weber Tanker

REPORT

April 2011

The Tanker Market's Struggle to keep its Head Above Water

Executive Summary

At the time of the last Weber report, we commented on how earnings had ebbed to their lowest for a decade as the tanker sector struggled to deal with rapid fleet growth (up 4.2% in 2010 despite the benefit of single hull phase out), and the declining benefit of the tonne mile accelerator as the share of the market for long haul trades from Middle East to US and West Africa to China declined during 2H10.

In July 2010, VLCC spot earnings for ME-NAmr collapsed from $38,000pd to $17,000pd and despite significant crude oil supply dislocation problems during at the start of 2011 have remained in the doldrums

Since that time, there has been some good news with the IEA's forecast for world crude oil demand in 2011 rising from 88.8Mnbd (December) to 89.4Mnbd (April). However, spot earnings have remained in the doldrums, and timecharter earnings have deteriorated further as the tanker sector continues to struggle to deal with the wall of new deliveries entering the market, OPEC's inadequate efforts to fill the gap left by lost Libyan supplies, and the emergence of a number of factors that threaten future demand growth.

Tumultuous start to 2011 ­ At the start of 2011, civil discontent in North Africa started to gain traction. The Presidents of Tunisia (Jan 14) and Egypt (Feb 14) fell in quick succession. Protesters are still being shot by repressive regimes from North Africa to the Middle East, and there are still fears that the government of Saudi Arabia could be destabilised. The MENA region produces 20% of the world's crude oil and also contains the crucial Suez Canal transport artery. The threat of the so called "Arab spring" to global crude oil supply is obvious and crude oil prices soared. When Libya became embroiled in a vicious civil war from mid February prices surged again, but most commentators suggested that even with Brent at USD125Bbl this was not yet high enough to cause significant demand destruction ­ although the unity of this position has been breaking down. On March 11, Japan was assailed by a huge earthquake ­ the largest it had ever recorded at 9.1 ­ and resulting tsunami and nuclear catastrophe. The Japanese stock market plunged, but other stock markets around the world once again held steady. Despite the intractable nuclear problem, it seemed that the market anticipated Japan would be able to deal with the disaster as it had done following the 1995 Kobe earthquake. The outlook for 2011 looks beset with potential pitfalls for the world economy ­ How about a fourth oil shock? Well, the oil price is nowhere near as high as its peak during the third oil shock - WTI got to USD146Bbl in July 2008 ­ and the IEA did not downgrade its crude oil demand forecast for 2011 (+1.5Mnbd) in its Oil Market Report published April. However, the threat of a fourth oil shock is clearly concerning world leaders from President Obama to President Sarkozy ­ and once again the role of speculators in inflating oil prices is under scrutiny with an announcement (Apr 26) that the G20 is investigating Platts and Argus over oil price transparency. Rising oil prices are even causing OPEC concern it would seem. Khalid al-Falih, chief executive officer of Aramco, said (April 26): "We are not comfortable with oil prices where they are today. We're concerned about the impact it could have on global economic growth." IEA poses the question in its April Oil Market Report, "In this new `highrisk' environment, what can check the remorseless rise in prices?" Answering the question, the IMF concludes that, with OPEC unlikely to revisit quotas, the most likely solution is the unpalatable combination of economic slowdown and demand growth moderation. It comments, "There are real risks that a sustained, USD100/Bblplus price environment will prove incompatible with the currently expected pace of economic recovery. Economic impacts from high prices are never instantaneous, and often take months to materialise, but preliminary data for early2011 already show signs of oil demand slowdown. Unfortunately, the surest remedy for high prices may ultimately prove to be high prices themselves". Despite its concern, the IEA hasn't yet cut its forecast for 2011 ­ although at 1.5Mnbd it is already expecting half the growth level seen in 2010. Whether or not there is a fourth oil shock, if oil prices do get high enough to start the process of demand destruction (or even cause forecast demand growth to be revised down) this may be sufficient to tip the world back into recession.

These are most definitely nervous times on the road to recovery back from the Great Recession. The latest figures from the UK suggest that it has just tiptoed past a double dip recession with 0.5% GDP growth in 1Q11. Apart from rising oil prices ­ escalating prices for other commodities and food are set to dominate the headlines over the next few months with food inflation a particular worry for China. Unrest in North Africa and the Middle East will also continue to add to the anxiety about the state of the recovery with Syria and Yemen most in the news at the moment and the Libyan crisis turning into an intractable civil war. Also at the top of the watch list - concerns about the political will in the US to halve its deficit by 2013 (as it is required to do so under its G20 obligation) will continue to generate debate amongst organizations from the IMF to the S&P ratings agency. Despite the number and seriousness of the issues facing the world over the next few months, the IMF remains sanguine, forecasting global GDP growth of 4.5% in both 2011 and 2012 respectively ­ with China (and other developing nations) continuing to underpin the recovery. It believes that the transition from stimulus to austerity is working in many countries around the world as private demand has "taken the baton" from artificial government demand. This view is supported by the latest economic metrics many of which are positive. Nevertheless, the IMF stresses the continuing importance of global unity in the fight back from the Great Recession arguing, "The need for ..... co-ordination at the global level may be as important today as at the peak of the crisis two years ago". The next (6th) full G20 summit is not until Nov 3 in Cannes. There is real sense that this meeting may be the most discordant in the organisations short history. The tanker market will struggle to keep its head above water ­ Fleet over supply has so far denied the sector access to the benefits from the global economy's gradual recovery from recession. It is likely that over supply problems will dominate the outlook for this sector for the foreseeable future. On paper tanker fleet deliveries are set for a record year in 2011 (55MnDwt), which would be even higher than the previous record high year in 2009 of 48Mndwt. However, based on the increasing importance of slippage in the delivery profile, we anticipate that around 20% of scheduled deliveries will be postponed, which means that deliveries will be around 43MnDwt in 2011. Scrapping, which reached a relatively high level in 2010 (13MnDwt) boosted by the phase out of single hull tonnage, is likely to remain at similar levels in 2011 with poor freight rates the primary driver rather than legislative phase out. Overall fleet growth is expected to be 6.5% in 2011, which is up on 2010 (4.2%) and close to the 7% expansion recorded in 2009. The predicted rate of growth may be mitigated if rates are sustained at or below breakeven levels for an extended period of time when scrapping is likely to rise significantly. Layup numbers are also on the rise and this factor may well become significant in moderating fleet growth in 2011. There is the prospect that significant number of newbuildings may be delivered straight into layup. Andrew Lockie, director of International Shipcare commented, "I don't think it's going to be too long now (for a pick-up in layup business). Banks are knocking at the doors of shipowners." The average cost of laying up a vessel is around USD1,500pd. Tanker owners must hope that the tonne mile accelerator kicks in again with a revival in long haul trades. However, we have already seen an unexpected decline in long haul

trades in 1Q11 following the loss of Libyan crude oil. Crude oil supply dislocation and the threat of crude oil supply dislocation would normally act as accelerators to tanker rates. A typical scenario might be that other producers increase production to compensate for the supply outage, consumers look to build up stocks to counter the elevated risk of further disruption to supplies, and tanker earnings improve as the fleet caught out of position scrabbles to meet the changing trade requirement. However, the interruption in Libyan crude oil exports prompted a switch to shorter haul routes with West African crude switching from east to west, and eastern importers relying increasingly on Middle Eastern supplies.

The relatively low level of global stocks provides a glimmer of hope. In its April 2011 Oil Market Report, the IEA commented, "Recent lower supply levels, if sustained, could leave OECD stocks looking much tighter by endyear. Amid heightened geopolitical risks, a smaller supply cushion leaves the market more exposed to supply or demand shocks". Despite these potentially mitigating factors and in the absence of a major wild card event, tanker owners will not be able to escape the drag of fleet over-supply, and are likely to come under increasing pressure during the remainder of 2011. Evidence of the developing pressure cooker environment was provided by one tanker broker, while talking about the prospects for a tanker owner, commented "Although risks remain, we believe this owner is likely to ride off the weak cycle and live to see a recovery in asset values." However, it went on to say that "A minimum cash covenant of USD50Mn will likely be breached 2H11 on our numbers," they added. "We estimate that USD27,000pd for VLCCs will be needed to avoid this."

The Year So Far - Chart Wall

Tanker Rates/Prices

natural disasters. In the case of Japan, the knock on nuclear disaster has led to a rethink of the country's long term energy mix. With nuclear out of fashion, it looks like LNG may be the biggest winner. However, in the short term there is some evidence that crude oil and product imports into Japan have increased in the immediate aftermath of the crisis. The failure of the tanker sector to capitalise on the events of 1Q11 indicates that the intractable problem of fleet over supply continues to dominate the outlook and drag down the market.

As rates have struggled so newbuilding prices ­ which started the year on a relatively stable footing ­ have started to subside, while secondhand prices, in decline since mid 2010, have seen their slide continue.

Tanker Fleet

The relentless rise in tanker supply continues. At end of 1Q11, tanker fleet was up by 6.3% since the end of 2009 and was up even 1.3% since the end of 2010.

Political and geophysical conditions have been in uproar since the start of the year. By contrast tanker dirty earnings have continued to languish in the doldrums, while clean rates have showed a modest improvement.

The decline in tanker newbuilding values defies the increase in steel prices and reflects the low level of ordering in this sector. Yards have switched their attention to the more buoyant offshore and container sectors.

During 1Q11, Libyan exports dropped out from mid February while the threat persists that further supply disruption might be extended across an entire region from Nigeria to Saudi Region. Crude oil supply dislocation and the threat of crude oil supply dislocation would normally act as accelerators to tanker rates. A typical scenario might be that other producers increase production to compensate for the supply outage, consumers look to build up stocks to counter the elevated risk of further disruption to supplies, and tanker earnings improve as the fleet caught out of position scrabbles to meet the changing trade requirement. The major geophysical event during 1Q11 was the Japanese earthquake on Mar 11. It is difficult to predict the consequences of

However, the poor performance of tanker rates also reflects a number of other factors. The chart below shows how operating costs have been inflated by the rapid rise in bunkers. But perhaps most significantly, the interruption in Libyan crude oil exports has prompted a switch to shorter haul routes with West African crude switching from west to east, and eastern importers relying increasingly on Middle Eastern supplies. The demand for sweet West African crude had benefitted the Suezmax sector for a while but this advantage didn't last long in part because movements from West Africa to Asia have been hampered by a wide Brent-Dubai spread. Overall the switch to shorter haul trade has acted as a decelerator for tanker demand.

2011 will see the problem of oversupply reach its zenith with the pace of deliveries set to accelerate. A record 54.7MnDwt is scheduled to be added to the fleet compared with 42.3MnDwt and 47.8MnDwt in 2010 and 2009 respectively ­ and an average of 30MnDwt per annum for the period 2000-2010.

In contrast to the youthful end of the market, vessels at the end of their trading days have seen scrap prices steadily increases in line with steel prices for more than two years

Scrapping activity has been unremarkable during 1Q11 with just 2MnDwt removed, which is

lower than the 3.5MnDwt per quarter demolished in the single hull drop dead year of 2010 or the 5MnDwt per quarter taken out in the ten year high year of 2002. It seems unlikely given the severity of over-supply that scrapping will not intensify significantly during the remainder of the year.

Moreover, the IMF in its latest World Economic Outlook published in April believes that the recovery from the Great Recession remains on track and broadly in line with their expectations. However, the Centre for Global Energy Studies takes a different view. It argues that , "Oil prices [generally] are rising to levels that are beginning to affect demand, yet the world is being told once again that markets remain `wellsupplied' with crude and that the upward march of prices does `not reflect the realities of supply and demand.'" Secondhand values are close to the lows seen at the end of 2009, and with some shipping companies struggling to stay afloat bargains do exist. However, sales volumes are moderate ­ perhaps reflecting the fact that most shipping companies are still very risk averse and even some of the more well established companies still have balance sheets underwater. Members of the Organization of Petroleum Exporting Countries have not replaced oil production lost to the conflict in Libya, leaving a shortage of 1Mnbd last month, while global crude oil stocks have been declining since 1Q10. "If OPEC will not raise supply to balance the market, demand will have to come down eventually, which will only be achieved by a repeat of the record prices of 2008,"

Investor Activity

As discussed, tanker ordering has been at almost negligible levels during 1Q11 with just 1MnDwt ordered compared with 8MnDwt per quarter in the peak ordering year of 2008.

Crude Oil Production

World crude oil production started the year strongly with the IEA forecasting a 1.4Mnbd increase in demand in 2011 building on the 2.9Mnbd increase in 2010. It should be remembered, of course, that the rise in global demand follows two years of demand contraction in 2008 and 2009 ­ and means that if demand expectations for 2011 are met then demand growth will have averaged just 0.8% over the last 5 years. The latest IEA report (Apr 12) suggests that Saudi Arabia actually throttled back production from mid March. It sites some reasons outside its control for example its sour crude was not acceptable to customers used to Libya's sweet crude, and it has taken time for it to develop two new sweeter crude oil blends of its own. Apart from Saudi Arabia, Iraqi and Russian crude oil production have started 2011 strongly.

The good news though is that the tanker orderbook is close to 100MnDwt - its lowest level since early 2006, and getting close to half what it was at its peak in 2008.

Crude Oil Demand

Despite the steep rise in crude oil prices, most commentators including the IEA and Barclays Capital do not yet believe that prices are high enough to cause significant demand destruction.

Another sector with chronic oversupply problems is the dry bulk sector where ordering is also well down although it is still much higher than for tankers. Over 8MnDwt of dry bulk tonnage was ordered in 1Q11 compared with a quarterly average of 20MnDwt in 2010.

The loss of Libyan crude oil production is only partially reflected in the chart below. It is estimated that Libyan crude oil production had fallen by 75% by the end of February.

compensating for reduced deep water drilling

In the US, product stocks are less plentiful with gasoline stocks falling rapidly since January to a level well below the five year average. The implication is that refinery runs can be expected to increase in the short term.

The week starting 25/2 proved pivotal to a further surge in oil prices as Colonel Gadaffi got into difficulties and Libya became engulfed in a vicious civil war which immediately cut its crude oil exports by 75% (over 1Mnbd). By mid April, there was no sign that the latest surge in oil prices was at an end with Brent breaking the USD125Bbl barrier. The IMF fuelled fears that oil price rises are not yet over by warning that USD150Bbl was on the horizon in its World Energy Outlook.

US oil production, which has been hampered by the fallout from the BP US Gulf oil spill, is still well below levels seen at the start of 2010 even the US government has started to issue deep sea drilling licenses once again.

Crude Oil Stocks

Crude Oil Exploration

World rig activity, which slumped in mid 2009 as a result of the Great Recession and the collapse in oil prices, has been on the rise since 2Q10 driven by the sharp rise in oil prices.

Global crude oil stocks have been declining since the end of 1Q10. Global stock cover was below 70 days at the start of second quarter in 2011, a level last seen at the same point in 2008 and nearly 5 days below the same time last year. The situation is somewhat different in the US where crude oil stocks are well above 5 year average levels. This factor may help to explain why US crude oil prices lag behind international oil prices e.g. Brent.

Crude Oil Prices

Crude oil prices had been creeping up during 2H10, in part because of rising tensions in North Africa ­ but prices really started to move up from the end of January with Brent breaking USD100Bbl for the first time in two years when the situation in Egypt turned serious threatening the closure of the Suez Canal. The price surge looked to be contained when President Mubarak of Egypt stepped down 11/2.

An interesting development in the rise in oil prices is that Brent has risen significantly faster and further than the WTI benchmark. The price spread today is around USD15Bbl, but as recently as August 2010, Brent was headed by WTI. Part of the reason for the current dislocation is that some believe WTI reflects domestic supply/demand conditions in the US, while Brent is more of an international marker reflecting concerns about risk surrounding global oil supply.

US rig activity has followed the global growth path with rising land based rig employment

The ascent of oil prices has been mirrored by the rise in other commodity prices including iron ore, coal and food stuffs. Commodity price rises are underpinning rising inflation and have increased risks that the slow, painful recovery from the Great Recession could yet be derailed.

At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said (Apr 11), "The recent surge in oil prices is part of a wider upsurge in commodity prices, which is fuelling inflation around the world. Gold prices have hit record high prices at around $1,465/oz, corn prices are also hovering near record highs, and copper prices have shot higher in recent weeks." They pointed out, "Record gold and food prices have stoked inflationary concerns for governments around the world, and the oil price hikes are also leading to inflation as distribution costs soar in consuming countries that do not subsidize fuels."

.

China Crude Oil Imports

China 1Q11 GDP grew faster than expected at 9.7%, but concerns that the economy is overheating persist with inflation running at 5.4% despite tightening measures taken by the government.

Crude oil and product imports started the year strongly, but efforts to rein back the economy may mean a period of more subdued imports.

The Year so far 2011 `Great Recession' ­ Civil unrest and earthquake fail to knock 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.

Apr 8 2008: IMF

says the effects are spreading from subprime mortgage assets to other sectors, such as commercial property, consumer credit, and company debt.

Oct 3 2008: The fightback begins The US House of

Representatives passes a USD700bn (£394bn) government plan to rescue the US financial sector.

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

2 and 3 Quarter 2009: Tanker freight rates decouple

due to structural problems with fleet supply.

nd

rd

Dec 2009: Copenhagen Climate Change Conference ­fails

to secure deal

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.

Sep 15 2008: Lehman Brothers

becomes the first major bank to collapse since the start of the credit crisis

Nov 9 2008: China reacts ­

China reveals USD586Bn stimulus package. Second announcement (Mar 4, 2009) beefing up stimulus package

th 4 Quarter 2009: Share prices maintain momentum ­and

tanker freight rates finally start to improve ­ even starting to close the gap on share price gains.

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.

April 2011 ­ Commodity price rises: High

oil prices threaten demand destruction and prospect of derailing the recovery, but market steady.

At the start of 2011, it seemed that the road to recovery was getting a little straighter. The summer crisis surrounding the Eurozone had abated if not gone away, in part because a second wave of US government stimulus ­ the USD600Bn Quantitative Easing 2 programme (QE2) ­ seemed to be working with US GDP up 3% in 4Q10, and this had left international investors somewhat reassured. The positive outlook was further reinforced by a successful visit to the US by the Chinese President, Hu Jintao (Jan 18) which coincided with reports that China's GDP had increased by 10.3% in 4Q10. Even a stark warning from the IMF (Jan 26) that the latest US fiscal stimulus was ill-judged, S&P's downgrading of the Japanese economy on debt worries (Jan 27), and suggestions that inflation was starting to get the better of an overheating Chinese economy were effectively brushed aside by the markets. In its February Oil Market Report, the IEA revised up its forecast for global crude oil demand in 2011.

North Africa burns - However, the world turned again when civil discontent in North Africa started to gain traction, The Presidents of Tunisia (Jan 14) and Egypt (Feb 14) fell in quick succession. Protesters were being shot by repressive regimes from North Africa to the Middle East, and there were even fears that the government of Saudi Arabia could be destabilised. The MENA region produces 20% of the world's crude oil and also contains the crucial Suez Canal transport artery. The threat to global crude oil supply was obvious and crude oil prices soared. When Libya became embroiled in a vicious civil war from mid February, oil prices surged again (WTI broke through the USD100Bbl barrier at the start of March, while Brent ­ which had already broken the barrier at the end of Jan - headed up towards USD125Bbl). The spectre of demand destruction was raised for the first time since 2008. It seemed that the market was unimpressed by Saudi Arabia's pronouncements that it would increase production to replace any supply shortfall ­ in part because its sour crude was not acceptable to some of Libya's customer who preferred sweeter crudes. However stock markets held firm with the consensus opinion viewing Brent at USD125Bbl as not yet high enough to derail the recovery. Japan's earthquake - On March 11, Japan was assailed by a huge earthquake ­ the largest it had ever recorded at 9.1 ­ and resulting tsunami and nuclear catastrophe. The Japanese stock market plunged, but other stock markets around the world once again held steady. Despite the intractable nuclear problem, it seemed that the market anticipated Japan would be able to deal with the disaster as it had done following the 1995 Kobe earthquake. In its April Oil Market Report, the IEA left its forecast for global crude oil demand in 2011 unchanged. By mid March, sentiment in the energy markets - still caught between the MENA turmoil and Japanese crisis - was turning more positive. Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington said, "Event risk is building in the oil market as Gulf Cooperation Council troops have moved into Bahrain and the UN approves a no-fly zone across Libya. This is occurring at a time where spare capacity in Saudi Arabia is falling rapidly. Liquidity injections in Japan should ensure the negative impact on gross domestic product will be relatively modest. We therefore view events as bullish crude oil."

MENA discord unrelenting ­ At the end of April, perceived oil supply disruption risk remains very high with Syria and Yemen the countries now most in the spotlight. Investors are now also becoming increasingly concerned about rising commodity and food price inflation, alongside mounting evidence that the US may not have the political will to manage the transition from stimulus to austerity. Even though there are signs that the EU is getting to grips with managing the sovereign debt crisis that has dogged the region since 2009 with just two days required to agree the bailout package for Portugal after the call for assistance was made on April 6, the threat to the global recovery from the "Great Recession" is still very real. These threats are discussed in more detail in chapter 3.

(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 the attempts by OPEC to manipulate oil prices by micro managing the amount of crude oil it produces. 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 (right) 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 throughout the year (gradually building in strength after a decidedly sticky start). Notwithstanding a mid-year revival, the BDTI has charted a fairly miserable course through 2009 and does not reflect at all the more upbeat mood of global markets or indeed the slightly more optimistic crude oil demand forecasts. This index appears to be dominated by industry specific issues related to excess fleet supply and so it can probably be considered to be an unreliable lead indicator at the moment. The BDI is perhaps the most troubling of the indices in terms of providing a clue to the direction of world economic growth as it seemed to be functioning quite well in this role until mid-year. During 1Q09, the BDI started to revive before the Dow Jones and continued to improve during 2Q09. The recovery in the BDI's fortunes during 1H09 ties in with the improved fortunes for the world economy and perhaps justifies the BDI's lead indicator status. However, if the BDI is indeed a good lead indicator then what are we to make of the decline of the index during 3Q09. Although it is by no means as depressed as the BDTI. Perhaps like the BDTI, the BDI is being overwhelmed by its own industry specific issues related to excess fleet supply (with deliveries set to more than double in 2010 to 113MnDwt from 50MnDwt in 2009), and can no longer be considered a reliable indicator of the direction of global economic growth.

Pulse Series World Economic Action ­ G20 ­ Still sticking together despite pressure on US

The divisions between countries on the best course of action required to ensure that the recovery from the Great Recession does not stall are increasingly apparent. The barracking from the sidelines is also getting louder with the US increasingly coming into the firing line with its reluctance to move beyond the stimulus phase of the recovery. In April, the US fell foul of both the IMF and Standard & Poors. The IMF commented (Apr 13) that the US lacks a "credible strategy" to stabilize its mounting public debt posing a small but significant risk of a new global economic crisis. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016. Standard & Poors rocked the boat (Apr 18). While affirming its `AAA/A-1+' sovereign credit rating for the US, S&P has revised its US outlook to negative because it says, "the U.S. has, relative to its `AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us. Despite the divisions the G20, which in London April 2009 emerged as the institution that united the world in its efforts to fend off economic meltdown, is still working to resolve the faults in the international banking system and global economic system that emerged during the descent into the Great Recession. In February the G20 Finance Ministers met in Paris (see photograph left) and reached a deal on indicators to detect the economic imbalances. In April, at a working meeting in Washington, Finance Ministers and central bankers from the G20 agreed a set of "indicative guidelines" to measure potential risks to the global economy posed by national economic policies. All members of the G20 will be monitored under the new system. In addition, members who account for more than 5% of total G20 economic output will be subject to a deeper, second-stage analysis of imbalances. They include the US, China, Japan, Germany and France. This is to reflect the greater potential for spillover effects from larger economies. The next major event for the G20 will be the full Presidential gathering in Cannes (Nov 3-4). President Sarkozy (who is using the international stage to bolster his domestic reelection chances in 2012) is looking for some headline results including the reform of the international monetary system and the creation of a G20 secretariat to oversee implementation of the bloc's decisions. Table showing timetable for G20 full meetings

Date 2011 2012

Event Sixth G20 Summit Seventh G20 Summit

Location Cannes, France, (Nov 34) Mexico

(a)

The first G20 leaders' summit was held in Washington November 14-15, 2008

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.

(b)

Briefing Series The Impact of the Japanese Earthquake

The Sendai earthquake/tsunami struck on March 11. It was the largest earthquake ever recorded in Japan and claimed the lives of around 20,000 people. Even now Japan is struggling to deal with its own Chernobyl as the Fukushima nuclear reactor continues to leak radiation, and the rebuilding process will take years. The damage to the manufacturing base, ports and infrastructure in north east Japan has been colossal. The figure below indicates the power stations caught up in the disaster, and lists the most important ports devastated by the tsunami. The only important oil import ports caught up in the disaster are Kashima and Shiogama. Six thermal coal power stations and four nuclear facilities were damaged to a lesser or greater degree.

The Impact Zone

What Kobe tells us about the likely long term impact of the recent earthquake

The Kobe Earthquake Jan 17, 1995 ­ also called the Great Hanshin Earthquake ­ was the last major earthquake to hit Japan prior to March 11. More than 6000 people lost their lives. It was estimated that 200,000 buildings collapsed and 120 of 150 quays in the port of Kobe were destroyed. The earthquake caused approximately ten trillion yen or USD102.5Bn in damage, 2.5% of Japan's GDP at the time. It has been argued that Kobe was a landmark event in Japan's so called "lost decade" blighted by almost continuous recession. However, information from The Economist(1) suggests that this assessment overlooks the relatively rapid pace of recovery in the earthquake region following the devastation. Even though less than half the port facilities had been rebuilt by that stage, within a year import volumes through the port had recovered fully and export volumes were nearly back to where they would have been without the disaster. Less than 15 months after the earthquake, in March 1996, manufacturing activity in greater Kobe was at 98% of its projected pre-quake level.

(1)

"Economics Focus: The Cost of calamity". The Economist, March 19th - 25th 2011.

The Economist findings link in with the chart below which shows the value of Japanese imports and exports over the last 16 years. This chart reveals that following the 1995 earthquake imports remained strong reflecting the requirement to rebuild the devastated region, while exports dropped significantly for the first 18 months after the disaster before stabilising. However, direct comparisons between Kobe and Mar 11 earthquake may be difficult to sustain. The recent quake was more massive, the nuclear fallout has added a completely new dimension that threatens to redefine Japan's energy mix, and the psyche of the Japanese living in the north is being undermined by continuing after-shocks which may continue for 10 years according to some reports.

Japan's refineries hit hard

Japan's refinery industry has been hit hard by the Mar 11 earthquake. At one point 6 refineries/1.4Mnbd were out of action. Fortunately, planned shutdowns this year--mostly from China, South Korea, and India--are not as high as in 2009 and 2010. Nevertheless, the Asian product market will tighten in 2011 with cracking margins already increasing. Possible shortages in the regions include (1) diesel oil as Japan was a net exporter of 190,000bd of diesel in 2010, and (2) low-sulfur fuel oil as demand for power generation expected to increase due to outages of nuclear plants. To make up for the loss in Japanese refining capacity in the aftermath of the disaster, some refiners have planned to increase their crude runs. Petrobras has reportedly increased production at its 100,000-b/d Nansei Sekiyu Nishihara refinery in Okinawa by 24%. Production at the facility was 46,000 b/d before the earthquake. JX also has reportedly planned to increase operating rates at its Okayama and Oita refineries by 30,000 b/d. Cosmo Oil has also reportedly planned to increase runs at its three other undamaged refineries in Sakai (100,000 b/d), Sakaide (110,000 b/d), and Yokkaichi (125,000 b/d). Meanwhile, the Japanese government has lowered the obligation for industries to hold emergency stocks by 3 days to 67 days, according to the IEA. As a result, around 8MnBbls of products could be released into the market. However, FACTS believes imports may still rise as a result of the refining outages, and some damaged refineries may take a while to come back on stream. Depending on the duration of the shutdown at the affected refineries, it is possible that METI will allow refiners to reverse (at least temporarily) some or all of the 285,000 b/d of refining capacity closures that occurred in 2010. A further 160,000 b/d was scheduled to permanently be removed from operable capacity this year at Fuji Oil's Sodegaura and Toa Oil's Keihin plants, but this could potentially be postponed to aid the country during reconstruction. Taking into account all the efforts to mitigate the fallout from the disaster, FACTS describes a relatively positive outlook for the products market. "Overall, barring a meltdown of nuclear plants, we should start to see the market easing back to normalcy over the next few weeks, and as a result, we expect cracking margins to moderate," FACTS said.

LNG likely the winner in the new energy mix

With nuclear outage both a short term (damage) and long term consequence (out of fashion) of the disaster, Japan is faced with the dilemma of how to rebalance its energy mix. The chart left shows the current profile of energy consumption. It is still very early days and analysts have very mixed views. However, it seems that many commentators believe that shift away from nuclear will benefit LNG ahead of coal and oil. The relatively weak position of oil is described by Amy Jeffrey of Houston's Rice University, former senior editor of Petroleum Intelligence Weekly. She argues that although the disasters of March 11 will produce extra demand for oil for electricity generation, this will be more than offset by the negative impact on industry of power cuts and lack of refining capacity. She says Japanese oil demand in March was reduced 350,000 b/d to 400,000 b/d, and a decline of 250,000 b/d net is likely for the summer. In contrast to consensus expectations for oil, some commentators have predicted that LNG demand will soar. David Fessler, energy expert for advisor Investment U, predicts the global trade, which has grown annually by 6 percent since 2000, will accelerate to 7.7 percent. He thinks Japan will need an extra 5Bn cubic meters of LNG this year, and 2Bn more in 2012. He believes the main beneficiary will be the largely state-owned Russian company Gazprom. More evidence for the improved prospects for LNG is reflected in the share prices of LNG shipping companies with Golar LNG share performing particularly strongly in recent weeks.

Pulse Series Unrest in the North Africa/Middle East Region

When the Japanese earthquake struck on Mar 11, seismic events were already taking place in North Africa where the Presidents of Egypt and Tunisia had fallen in quick succession, and where Libya was plunged into a civil war which had all but halted its oil export capability. There has been recent unrest in all the countries shown in the map below. The fear is that governments will fall like dominos. The consequences of such a sequence are magnified because the region supplies more than 20% of global crude oil production.

The chart at the bottom of the page (based on a similar chart published by the BBC) provides a league table of countries in the region that are considered most at risk. Yemen is currently topping the table. Its production of 0.3Mnbd is not significant, but if it fell it would be the 4th country in the region to implode in a matter of months and the domino scenario would take on even more credibility. Saudi Arabia, which has used its military in robust fashion to suppress unrest, is in mid table. Any disruption to its output as a result of civil unrest would quite obviously have dramatic consequences for the region and for the global economy. The loss of Libyan crude oil production has had more impact than first considered. The theoretical spare production capacity within OPEC is estimated at around 4Mnbd, more than enough to cover the Libyan outage. However, Libyan oil is of much higher quality than that produced by Saudi Arabia, the primary safety net in terms of spare production capacity, and users have been reluctant to switch to other lower quality sources. Saudi has reported that it is developing a sweeter crude oil blend to meet the specific demand requirement. This news is perhaps of more significance than Saudi Arabia's unexpected call at the beginning of April for oilfield service firms to expand the kingdom's oil rig count by nearly 30 percent ­ which would mean the rig count climbing from 92 to 118.

The Outlook for 2011

Broad Brush Background

US debt and global commodity price rises the next obstacles on the road to recovery

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 severe with demand contracting for four years before slowly starting to recover from 1984. Despite continuing fears of a double dip recession, it had been considered that the third shock has been consigned to history with 3Q10 exceeding the previous record for quarterly demand set in 2007. However, since the last Weber report the oil price has risen sharply. WTI has gone up from around USD91Bbl at the end of December to around USD112Bbl at the end of April (the corresponding figures for Brent are 95 and 125), and the chart makes it clear that demand destruction is back on the agenda What chances then for a fourth oil shock? Well, the oil price is nowhere near as high as its peak during the third oil shock - WTI got to USD146Bbl in July 2008 ­ and the IEA did not downgrade its crude oil demand forecast for 2011 (+1.5Mnbd) in its Oil Market Report published April. However, the threat of a fourth oil shock is clearly concerning world leaders from President Obama to President Sarkozy ­ and once again the role of speculators in inflating oil prices is under scrutiny with an announcement (Apr 26) that the G20 is investigating Platts and Argus over oil price transparency.

Whether or not there is a fourth oil shock, if oil prices do get high enough to start the process of demand destruction (or even cause forecast demand growth to be revised down) this may be sufficient to tip the world back into recession. These are most definitely nervous times on the road to recovery back from the Great Recession. Apart from rising oil prices ­ escalating prices for other commodities and food are set to dominate the headlines over the next few months with food inflation a particular worry for China. Unrest in North Africa and the Middle East will also continue to add to the anxiety about the state of the recovery with Syria and Yemen most in the news at the moment and the Libyan crisis turning into an intractable civil war. Also at the top of the watch list - concerns about the political will in the US to halve its deficit by 2013 (as it is required to do so under its G20 obligation) will continue to generate debate amongst organizations from the IMF to the S&P ratings agency. US feels the heat - It is this latter issue that may perhaps have the most impact in terms of whether the consensus approach to fighting back from the Great Recession can be salvaged. In the last Weber Report, we discussed how 2011 was expected to be a year of austerity but that the US decision to extend its own stimulus phase meant the global austerity crunch was effectively postponed. The US decision to go it alone was met with disapproval from the IMF which argued that QE2 was unlikely to do much for growth and raised the risk of a bond crisis over the medium term. The US has always acknowledged the need to eventually reduce the size of its huge sovereign debt mountain, but questioned the timing. Today US Republicans and Democrats are agreed about the need to start addressing the debt issue, but are in disagreement about the scale and timing of the cuts with a further stimulus phase (QE3) also on the horizon, and some commentators are questioning whether there is the political will to reach a timely agreement. One such skeptical commentator is the S&P credit rating agency. While affirming its `AAA/A-1+' sovereign credit rating for the US, S&P has revised its US outlook to negative because it says (Apr 18), "the U.S. has, relative to its `AAA' peers, what we consider to be very large budget deficits and rising government indebtedness. As the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable. We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer `AAA' sovereigns. The S&P announcement shock confidence in the strength of the US recovery. It came shortly after the latest disapproving statement from the IMF (Apr 13). "To meet the 2010 pledge by the Group of 20 countries for all advanced economies ­ except Japan ­ to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960", the IMF said. The collective bad press is starting to build pressure on the US government. Commodity Prices: Back to 2008 ­ In its half early World Economic Outlook published in April, the IMF acknowledged that the primary recovery risk has switched from fear about the strength of growth in developed economies to fear, as in 2008, about rising commodity prices. However, it is does not yet appear too concerned about this latest threat to the global economic revival. It said, "Commodity prices have increased more than expected, reflecting a combination of strong demand growth and supply shocks. Although these increases conjure up the specter of 1970s-style stagflation, they appear unlikely to derail the recovery". It should be noted though that investor confidence is still very fragile, and it will not take much for risk aversion to take hold once again. Stock markets recovered gradually from mid 2010 ­ but the gains were achieved with low traded volumes and low visible risk appetite. With commodity prices rising and pushing up inflation around the world investor confidence will fall lower (along with risk appetite). The US QE2 impact will be lost with banks building up capital reserves but lending remaining very low (back to 2H07 levels). MENA Destabilisation ­ Unrest in the region remains very high and it may well be that the so called "Arab spring" extends much further into 2011. The Saudi Arabian ruling elite does not look in any imminent danger, but the seriousness in which repressive regimes hold the threat is reflected in the actions of China. Despite being geographically nowhere near the epicenter of the crisis, the Chinese government appears so concerned about the potential spread of civil unrest to the east that it has initiated a severe crackdown on dissidents and religious groups including Christians. China Fights Inflation ­ China has other concerns too and the most pressing of these is inflation. Brian Coulton, an emerging markets strategist at LGIM believes that Beijing is not on top of inflation. He argues that the situation is so serious that China's GDP growth rate, which has been running at around 10% p.a. in recent years, could be halved. However, the FTCC argues it would be wrong to exaggerate the dangers

of inflation mainly because the events of 1989 at Tiananmen Square have made the political leadership acutely aware of the political and social consequences of runaway prices. It believes China will not take its eye off the ball. Despite the number and seriousness of the issues facing the world over the next few months, the IMF remains sanguine, forecasting global GDP growth of 4.5% in both 2011 and 2012 respectively. It believes that the transition from stimulus to austerity is working in many countries around the world as private demand has "taken the baton" from artificial government demand. This view is supported by the latest economic metrics many of which are positive. Nevertheless, it stresses the continuing importance of global unity in the fight back from the Great Recession arguing, "The need for ..... coordination at the global level may be as important today as at the peak of the crisis two years ago". The next (6th) full G20 summit is not until Nov 3 in Cannes. There is real sense that this meeting may be the most discordant in the organisations short history.

(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. IMF's World Economic Outlook (April 2011) http://www.imf.org/external/pubs/ft/weo/2011/01/index.htm

(b)

"The world economic recovery continues, more or less as predicted. Indeed, our growth forecasts are nearly unchanged since the January 2011 WEO Update and can be summarized in three numbers: We expect the world economy to grow at about 4½ percent a year in both 2011 and 2012, but with advanced economies growing at only 2½ percent while emerging and developing economies grow at a much higher 6½ percent. Earlier fears of a double-dip recession--which we did not share--have not materialized. The main worry was that in advanced economies, after an initial recovery driven by the inventory cycle and fiscal stimulus, growth would fizzle. The inventory cycle is now largely over and fiscal stimulus has turned to fiscal consolidation, but private demand has, for the most part, taken the baton. Fears have turned to commodity prices. Commodity prices have increased more than expected, reflecting a combination of strong demand growth and supply shocks. Although these increases conjure up the specter of 1970s-style stagflation, they appear unlikely to derail the recovery.................... Overall, the macro policy agenda for the world economy remains the same but, with the passage of time, more urgent. For the recovery to be sustained, advanced economies must achieve fiscal consolidation. To do this and to maintain growth, they need to rely more on external demand. Symmetrically, emerging market economies must rely less on external demand and more on domestic demand. Appreciation of emerging market economies' currencies relative to those of advanced economies is an important key to this global adjustment. The need for careful design at the national level and coordination at the global level may be as important today as at the peak of the crisis two years ago".

(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 MD of the IMF, who argues that Asia has emerged as an economic power house as a result of the banking meltdown.

Pulse Series Peak Oil ­ Sweet not sour becomes the issue

The loss of Libyan sweet crude causes disarray ­ Towards the end of February it was reported that Libyan crude had been cut back by 75%. This caused fresh impetus to oil prices (mot notably the Brent index) which were already inflating as a result of the destabilisation of Egypt in early February and the perceived threat to the Suez Canal. In timely fashion, Saudi announced its commitment to make up the shortfall, but its crude is sour and can't replace sweet crudes like those produced by Libya. Therefore, fears of shortages in Europe mounted pushing oil prices ever higher and eventually forcing European refiners to cut utilisation. Saudi Arabia tried to calm down the market, by developing a sweet crude designed specifically for Europe, but the reception has been luke warm - raising the new fear that "peak oil" may need to be considered as a phenomenon affecting different oil grades across a sliding timescale. The new Saudi sweet blend "special brew" ­ Saudi Arabia sells five key crudes: Arab Super Light, Extra Light, Light, Medium and Heavy. Its new sweet blend has an API gravity of 41-44 and sulphur content of 0.50.8 percent, which puts it into a category of light and sweet crude. At the end of March, Saudi Arabia has sold its first cargoes of "special brew" ­ 2 MnBbls split between BP and Austria's OMV. One major player in the Mediterranean commented, "I don't think it is a serious substitution. It is adding to the pressure on sour grades and I would want zero of this stuff in the region." Wikileaks (Feb 9) adds intrigue to peak oil debate. The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300BnBbls ­ nearly 40%. According to the cables, which date between 2007-09, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, said Saudi Arabia might reach an output of 12Mnbd in 10 years but before then ­ possibly as early as 2012 ­ global oil production would have hit its highest point. Fears about sweet shortage on top of IEA warning - In its latest Short-Term Energy Outlook (Jan 11), the IEA anticipates that global crude oil markets will tighten over the next 2 years as annual consumption grows by an average 1.5Mnbd and growth in supplies outside OPEC increases less than 100,000 b/d yearly. It expects non-OPEC crude and liquids production to rise by 160,000 b/d in 2011 and 20,000 b/d in 2012, with increases concentrated in a few countries, notably China, Canada, and Brazil. EIA anticipates that each of these overseas producers' output will grow by 120,000-150,000 b/d in 2011 and 2012. Ghana became a new non-OPEC producer in December with the startup of its Jubilee field, it noted. Other non-OPEC countries' production will decline, EIA predicted. It expects Mexico's production to drop by 200,000 b/d in 2011 and 80,000 b/d in 2012. "Similarly, the United Kingdom is expected to see production declines of an average 120,000 b/d in both 2011 and 2012 since oil production and the discovery of new reserves have not kept pace with the maturation of existing fields," it said. It also commented that it expects US crude oil production, which grew by 150,000 b/d in 2010 to 5.51Mnbd, to decline by 20,000 b/d in 2011 and 130,000 b/d in 2012. The 2011 forecast includes declines of 50,000 b/d in Alaska and 220,000 b/d in federal Gulf of Mexico production, which are almost offset by a projected 250,000 b/d increase in non-gulf production in the Lower 48 states, it said. In 2012, EIA said that it expects Lower 48 non-gulf output to grow by 70,000 b/d, Alaskan production to fall by 20,000 b/d, and output in the gulf to decrease by 180,000 b/d.

Pulse Series Brent to replace WTI as the global benchmark?

What has happened with regard to the Brent v WTI spread: The chart left shows how Brent and WTI, having followed roughly similar trajectories since the onset of the Great Recession in September 2008, parted company at the start of the year. It is clear that both benchmark prices have surged but Brent has surged ahead. This is unusual not just because of the history of moving in unison, but also because WTI is considered a higher grade crude oil than Brent. Before looking for any reasons why this divergence has taken place ­ it is worth looking at the recent history of oil price discussion. Background ­ Speculation: The role of speculators in the movement of oil prices has long been debated. When oil prices took off in2008, the US government set up hearings run by the Commodity Futures Trading Commission (CFTC) which looked into the mechanism of the futures market ­ the vehicle for betting on the direction of oil prices. The hearings succeeded in making futures transactions more transparent, but didn't manage to quantify the importance of speculators. Nevertheless, the fund manager, Michael Martins believes speculators are important. He argues that speculators may account for as little as 0.5% of transactions, but they have a disproportionate effect on oil prices because they are pushing one way (either up or down). So can we find any reasons for the widening spread? (1) Speculators may not be the answer but some still believe that shadowy forces are driving oil prices up. At a meeting in Riyadh on Apr 6, Saudi Arabia's Minister of Petroleum and Mineral Resources Ali I. AlNaimi and the United Kingdom's Energy and Climate Change Sec. Chris Huhne took aim at speculation in oil markets. The official Saudi Press Agency (SPA) reported that cooperation between consuming and exporting countries is important "to stabilize the market, avoid extreme price fluctuations, and decrease the volume of misinformation and exaggerated expectations," all of which harm petroleum markets. "AlNaimi and myself shared common views that there is no shortage of supply and hence there is no reason behind the soaring oil prices, which hover around $115-120/bbl today," said Huhne following his meeting with Al-Naimi. Huhne said Al-Naimi is "very committed on providing stability to the oil market." He said, "To have a very volatile oil market impacts growth. There is a very strong common interest between Saudi Arabia and consumers." (2) Local v Global - some believe WTI reflects domestic supply/demand conditions in the US, while Brent is more of an international marker reflecting concerns about risk surrounding global oil supply and the fact that global crude oil stocks have been falling since 1Q10. Inspection of US stock levels (see chart right) reveals that the US can be considered to be well supplied with oil and upward oil price pressure is relatively low. On the international stage, the threat to crude oil production across the North Africa and Middle Eastern regions (including Saudi Arabia) means some consider there is plenty to worry about in terms of global supply and that upward oil price pressure is relatively high. (3) A specific and well known factor that means WTI is prone to underpricing distortions is the contract's over-reliance on the Cushing delivery point in Oklahoma. This has a tendency to clog up due to limited capacity and one-way crude flows, a phenomenon which has become known as `Cushing syndrome`. WTI to become the global benchmark? ­ Most commentators argue that the current divergence is anything other than a short term phenomenon. However, it seems certain that Brent is about to topple US benchmark light crudes on the New York Mercantile Exchange as the most traded crude futures contract.

Potential Drivers for Tanker Market in 2011

Positive

Shipping Slippage ­ Delivery delays will have an increasingly 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. Layup and Scrapping - Andrew Lockie, director of International Shipcare believes that increases layups are just around the corner ­ and with spot earnings at or below operating breakeven accelerated scrapping is also on the cards for 2H11. `Balance Sheet' Recession ­ Low Appetite to Start Building ­ Shipowners have been focused on minimising debt rather than making new investments. There was a mid-2010 surge in ordering led by AET, Dynacom and Brightoil, but this rapidly petered out as freight rates fell sharply from mid year. With earnings expected to remain depressed, 2011 is likely to produce low orders. Less than 1MnDwt was ordered in 1Q11 compared with 3.2MnDwt at the height of Great Recession in 1Q09 and 7.6MnDwt in 1Q10. Oil Industry Demand to Continue to Recover in 2011(4) ­ Demand has picked up more quickly than expected after two consecutive years of contraction in 20072008. The current estimates for 2011 are for demand to grow in the range 1.4-1.5 Mnbd. As in 2010, the recovery in demand in 2011 will be led by emerging markets. Global Stocks Low ­ Global crude oil stocks have been declining since the end of 1Q10. Global stock cover was below 70 days at the start of 2Q11, a level last seen at the same point in 2008 and nearly 5 days below the same time last year. World well Supplied with Oil - CERA forecast OPEC crude oil capacity is expected to average 6Mnbd in 2010 and 5.5Mnbd in 2011, well above the 2.5Mnbd level seen as recently as 2008. However, the reluctance of Libyan customers to switch to Saudi sour blends indicates that the type and not just the amount of spare capacity will be important in the future. World Economy Recovery "on track" ­ In its latest WEO (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. China's Soft Landing ­ Despite government efforts to cool the economy, China's 1Q11 GDP grew faster than expected at 9.7%, while inflation climbed to a 3 year high. The government's commitment to lowering inflation should eventually ensure a soft landing.

Wild Cards

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 19792000 average for

Negative

Shipping Supply Growth to hit record levels ­ On paper it looks like 2011 (54MnDwt) will be a record delivery year - even higher than 2009 and 2010 when deliveries hit 48MnDwt and 42MnDwt respectively - which compares with annual average deliveries 2004-2008 of 30MnDwt. Scrapping was a mitigating factor to growth in 2010 with single hull phase out reaching its peak year. There will be no legislative If scrapping only matches 5 year average levels, then fleet percentage growth could reach double figures. The sector must hope that a combination of slippage, increased scrapping, and layup come to the rescue. `Balance Sheet' Recession ­ Debt Burden ­ Very depressed earnings means that ­ in contrast to some other parts of the global economy - shipowners 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 or drafting in private equity capital. The process of renegotiating breach threatened debt covenants goes on as asset values continue to fall. The prospect of consolidation in the industry is higher than at any time since the onset of the Great Recession. Floating Storage ­ In April 2011, 16-18 VLCCs were reported in storage down from 39 VLCCs in mid 2010. Iran's problem selling its crude is a major driver for this market. However, until crude oil prices fall, floating storage is unlikely to play as important a role as it did in 2010 in underpinning freight rates. Oil Industry OECD Demand once again the Weak Link ­ IEA predict a modest increase in OECD oil demand in 2010 and 2011, but highlight the vulnerability of this positive forecast to a double dip recession. Oil Prices at Unsustainable Levels(1) ­ At the start of 2011, forecasters were predicting that oil price might break the USD100Bbl during 2H11, but Brent has already broken through the USD125Bbl and crude oil demand destruction is once again a phrase being used. World Economy Risks to Recovery still elevated ­ Commodity and food prices rises are now at the top of investor watch lists. Fears about whether the US has the political will to agree budget cuts have also hit the headlines in April with S&P downgrading its US outlook. Eurozone sovereign debt issues have not gone away with Portugal having asked for assistance and Spain still in the frame. G20 division opening up ­ The spotlight on the US's struggle to switch to the austerity phase of the recovery is exposing divisions within the group on the depth and pace of cuts.

http://www.metoffice.gov.uk/climate/uk/2009/

http://www.metoffice.gov.uk/weather/world/seasonal/

Geopolitical Hotspots Libya ­ Concern that Libyan crisis starting to look intractable and ugly with Gadaffi using cluster bombs. North Africa/Middle East Region ­ Syria and Yemen are experiencing the greatest level of civil unrest as at mid April with protestors being killed in both countries in recent weeks. However, the potential for major upheaval/regime change generated by domestic forces all across the region remain high ­ with the possibility that even Saudi Arabia could be destabilised. Israel/Palestine ­ level of aggression once again rising. However, both sides acknowledge President Obama September 2011 deadline for peace talks. Nigeria ­Presidential elections Apr 16 The preliminary results of Nigeria's presidential elections point to a victory for the incumbent, President Goodluck Jonathan, heightening the chance of policy continuity. However, the question remains whether all Nigerians respect the victory Simmering Disputes ­ There are a number of hotspots that have fallen out of the day to day headline news but could resurface at any time. 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 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.

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 Dec 2010, Short Term Energy Outlook, the EIA forecast that WTI oil prices will average USD86.08Bbl in 2011 up from USD78.98Bbl in 2010. However, some commentators believed prices could go higher e.g.. Dec 15 2010 -Goldman Sachs Group Inc. anticipated that falling OPEC spare production capacity will contribute to pushing WTI oil prices over USD100Bbl by mid 2011. Just 4 months later these forecast look hopelessly inadequate as Brent oil prices have broken through the USD125Bbl barrier and WTI has tested the USD110Bbl barrier. The EIA in its April Short Term Energy Outlook has revised its forecast price for WTI to USD106.4Bbl and USD113.5Bbl in 2011 and 2012 respectively. The average price for WTI 2011 ytd (as at end April) is USD96Bbl. 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. However, as a general consensus, it seems that oil prices in the USD50-55bbl are required. At the start of 2008, it was thought that oil companies were basing their budgets on an oil price of around USD60-80bbl. WoodMac Exploration Service Manager Alan Murray told delegates at International Petroleum Week in London that operators now need to assume an oil price of USD70bbl to earn close to 15% on exploration. John B. Hess provides an illustration of rising exploration costs - a deepwater rig that cost USD100,000-200,000pd in 2002 today costs USD500,000-600,000pd--if you can find one available. Oliver Onyewuenyi, programme manager of Global Deepwater R&D, Shell E&P talking about the challenges facing those tapping into West Africa's deepwater resources proposes a well cost of up to USD100Mn/well.

(2)

(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. 2011 Demand Forecast ­ IEA's Mar Crude Oil Demand Growth Estimates for 2009 -1.3% (-1.1Mnbd, 85Mnbd), 2010 +3.4% (+2.9Mnbd, 87.9Mnbd), 2011 +1.6% (+1.4Mnbd, 89.4Mnbd) compares with the Apr forecasts from the US EIA 2009 -1.4MnBd, 2010 +2.0Mnbd, 2011 + 1.5Mnbd, 2012 +1.6Mnbd, OPEC 2009 -1.5Mnbd, 2010 +2.0Mnbd, 2011 +1.4Mnb. IMF Real GDP forecasts (Apr 11)

(4)

(5)

IMF Real GDP forecasts World China India USA Euro area Japan Middle East & Africa

09 -0.5 9.2 6.8 -2.6 -4.1 -6.3 1.8

10 5.0 10.3 10.4 2.8 1.7 3.9 3.8

e11 4.4 9.6 8.2 2.8 1.6 1.4 4.1

e12 4.5 9.5 7.8 2.9 1.8 2.1 4.2

(Oct 10) World 08-09-e10-e11 2.8, -0.6, 4.8, 4.2, China 9.6, 9.1, 10.5, 9.6, India 6.4, 5.7, 9.7, 8.4, USA 0.0, -2.6, 2.6, 2.3, Euro area 0.5, -4.1, 1.7, 1.5, Japan -1.2, -5.2, 2.8, 1.5, Middle East & Africa 5.0, 2.0, 4.1, 5.1, (Apr 10) World 08-09-e10-e11 3.0, -0.6, 4.2, 4.3, China 9.6, 8.7, 10.0, 9.9, India 7.3, 5.7, 8.8, 8.4, USA 0.4, -2.4, 3.1, 2.6, Euro area 0.6, -4.1, 1.0, 1.5, Japan -1.2, -5.2, 1.9, 2.0, Middle East 5.1, 2.4, 4.5, 4.8, (Oct 09) World 07-08-e09-e10 5.2, 3.2, -1.0, 3.0, China 13, 9.0, 8,5, 9.0, India 9.4, 7.3, 5.4, 6.4, USA 2.1, 0.4, -2.7, 1.5, Euro area 2.7, 0.7, -4.2, 0.3, Japan 2.3, -0.7, -5.4, 1.7, Middle East 6.2, 5.4, 2.0, 4.2 (Apr 09) World 07-08e09-e105.2, 3.2, -1.3, 1.9, China 13, 9.0, 6,5, 7.5, India 9.3, 7.3, 4.5, 5.6, USA 2.0, 1.1, -2.8, 0.0, Euro area 2.7, 0.9, -4.2, -0.4, Japan 2.4, -0.6, -6.2, 0.5, Middle East 6.3, 5.9, 2.5, 3.5 (Oct 08) World 06-07-e08-e09 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 5.7, 5.9, 6.4, 5.9

Pulse Series 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. The Financial Times China Confidential (FTCC) ­ a strong advocate of the theory that the China success story has much further to run - has been struggling in recent months to see beyond the negatives in the China story. In particular, it has chronicled China's troubles with controlling inflation ­ described by FTCC as the "red button" issue. Over the last six months, in its efforts to control inflation, the People's Bank of China has raised interest rates three times, lending reserves six times, and imposed new restrictions on all lending institutions. The annualised rise in the Consumer Price Index, hovering around 5 per cent, does not sound catastrophic, but for manufacturers and other businesses prices are going up much faster. The Export Price Index was officially rising at 11. 4 per cent in February, and surveys by the FTCC suggest the true level of industrial cost inflation is much higher. Brian Coulton, an emerging markets strategist at LGIM believes that Beijing is not on top of inflation. He argues that the situation is so serious that China's GDP growth rate, which has been running at around 10% p.a. in recent years, could be halved. However, the FTCC argues it would be wrong to exaggerate the dangers of inflation mainly because the events of 1989 at Tiananmen Square have made the political leadership acutely aware of the political and social consequences of runaway prices. It believes China will not take its eye off the ball. Nevertheless,

the FTCC sees inflation as heralding a new age in China's development ­

a new age with opportunities and risks for the global economy and indeed for the shipping industry. China emerged as a major power on the world stage at the start of the new millennium. Its rise was a major factor in the surge in the fortunes of the global economy. During this period, China effectively exported price stability around the world. Here was a large scale, highly organized low cost producer whose exporters were rapidly able to dominate market share across great swathes of manufacturing. The new workshop of the world, it transformed global trade by importing vast quantities of raw materials and exporting vast quantities of finished products. Its economy proved so buoyant and resilient that it was able to underpin the global economy even during the Great Recession. China's success was built on low cost labor, but national success created a hunger for a higher standard of living among the people. Rising wages combined with rapidly escalating commodity price inflation has effectively ended the take off phase in China's industrial development. In the new age, the FTCC expects to see China engaged in an ongoing battle to control structural inflation, whilst looking to develop its domestic

market and invest overseas. The new age danger for the world economy ­ and the western economies in particular which are already facing rising prices ­ is that China's next contribution to the global economy will be as an exporter of inflation. China's leaders, entrepreneurs and people are going to have to learn to live with significant inflation, as its causes, as analysed by the Financial Times, are largely structural. With workers in Beijing now earning three times more than their regional counterparts, Chinese businesses are being outcompeted by the likes of Vietnam and India. So as its workforce loses competitiveness, in its next phase, China will have to exploit its other advantages. Fortunately for the Chinese, these are very significant, and big enough to ensure the nation will retain its dominant position on the world stage for the foreseeable future. China's manufacturers are learning how to cut costs by using lower grade components, and reduce wage bills through automation in factories. The nation's other important advantages include a workforce that has become highly skilled, excellent internal transport, and extensive local networks of local suppliers for industry. As China's internal economy changes, it is increasingly looking overseas for investment and trading opportunities. Trade between China and Africa expanded five-fold between 2000 and 2006, and Chinese businesses have established a host of joint ventures and other commercial interests around the globe. Initially these concentrated on securing crucial raw materials such as Australian iron ore mines, but recently the scope has expanded dramatically. In November, for example, a Chinese firm spent USD50Mn on a stake in the French cosmetics business L'Occitaine International, and a Shanghai consortium has even bought a seven per cent share in the holiday company Club Med. In March, the British investment banker Jacob Rothschild set up a new investment fund to channel USD750Mn from China to private equity projects worldwide. The FTCC believes Chinese firms could spend as much as USD 100Bn on mergers and acquisitions overseas in 2011. In the short to medium term the fortunes of the shipping industry are tied to Chinese success. In this respect, it is no different from other industries. Shipping does derive a specific benefit because of the remoteness of China from its import/export markets as long distances act as an accelerator to seaborne demand. However, like other industries, what it craves most is for China to remain strong and to drive trade growth. One of the most convincing arguments supporting the idea that China will remain a driver for shipping for years to come is the notion that just as inflation has turned into a structural problem so growth is also built in. This is evinced by the projection that 143Mn more Chinese will be living in Chinese cities by 2015. Of course trading patterns will inevitably change as China's more competitive neighbors Vietnam, India, Indonesia take over the mantle of low cost producers of mass manufactured goods. This changing of the guard will cause trading patterns to change. Changing trading patterns will almost certainly present new opportunities for shipping.

Tanker Market Outlook for 2011

The following section looks at whether tanker shipping can benefit from the recovery from recession if it continues into 2011, or if it is strong enough to keep its head above water if the economy plunges into a dip recession. The primary focus of this analysis is to look at elements of tanker supply in the context of changing demand patterns. (a) Projecting fleet supply for the tanker sector has become more complicated than in the bull market of recent years. It is no longer sufficient just to factor in scrapping based on the IMO drop dead schedule for single hull tankers, and deliveries from the current orderbook. In the recession era, it is now necessary to take account of a likely acceleration in scrapping triggered by depressed freight rates, and the prospect of orderbook cancellations. The removal (conversion) of vessels for other forms of trading is another important factor although much less so than in 2008 when tankers were in demand to be recycled for the dry and fpso markets. The storage market has long provided an alternative off market form of employment and this continues to play an important (if temporary) part in influencing overall tanker supply. Delivery slippage is the latest factor to have to be considered when forecasting supply.

(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.

Tanker Supply Prospects in 2011

On paper tanker fleet deliveries are set for a record year in 2011 (55MnDwt), which would be even higher than the previous record high year in 2009 of 48Mndwt. However, based on the increasing importance of slippage in the delivery profile, we anticipate that around 20% of scheduled deliveries will be postponed, which means that deliveries will be around 43MnDwt in 2011. Scrapping, which reached a relatively high level in 2010 (13MnDwt) boosted by the phase out of single hull tonnage, is likely to remain at similar levels in 2011 with poor freight rates the primary driver rather than legislative phase out. Overall fleet growth is expected to be 6.5% in 2011, which is up on 2010 (4.2%) and close to the 7% expansion recorded in 2009. The predicted rate of growth may be mitigated if rates are sustained at or below breakeven levels for an extended period of time when scrapping is likely to rise significantly. Layup numbers are also on the rise and this factor may well become significant in mitigating fleet growth in 2011. Andrew Lockie, director of International Shipcare (The Singapore-based maritime firm was purchased for an undisclosed sum from BP at the end of last year by Lockie and other former shipping executives of the British oil major) commented Apr 5 at the firm's formal launch, "I don't think it's going to be too long now (for a pick-up in layup business). Banks are knocking at the doors of shipowners." The average cost of laying up a vessel is around USD1,500pd.

Briefing Series 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 30% in 2010.

Tanker Slippage Rates 20072010

10% 0%

Slippage Rates

10% 20% 30% 40% 50% 60% 2007 2008 2009 2010 VLCC Suezmax Aframax

Forecasting the Deliveries in 2010 for the VLCC Sector ­ The initial low case forecast for VLCC deliveries in 2011 is 71 compared with 54 deliveries in 2010. The delivery schedule is end loaded. This forecast is based on slippage rates of 22%.

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.

Calendar of Events 2011/12

April 2011 St George's Day (23) 3rd BRICS meeting IMF's semi annual World Economic Outlook Space shuttle undertakes final voyage before retirement. Pakistan to launch its first satellite July OECD semi annual world economic review Poland takes over the EU presidency (Jul 1) IEA releases 2012 demand forecast. OPEC releases long range forecast IMO MEPC 62 (Jul 11-15) ­ submission on GHG Emissions from Ships October IMF's semi annual World Economic Outlook OPEC 160th Ordinary Meeting () May 10th Arab Energy Conference 37th G8 summit held Deauville, France (May 26-27) UK vote on electoral reform (May 5) June The Atlantic hurricane season starts (June 1) OPEC 159th Ordinary Meeting (Vienna, Jun 8) Turkish General Election (Jun 12)

Spring

August One year to go until London Olympics World Humanitarian Day

September Ten year anniversary of 9/11 New Zealand host 2011 World Cup World Bank & IMF meet Washington DC (Sep 23) World Maritime Day (Sep 29)

Summer

November 6th G20 summit held Cannes, France (3-4) The Atlantic hurricane season ends (Nov 30) February Chinese celebrate the Year of the Water Dragon 14 Years since Osama bin Laden issued a fatwa against all Jews and Crusaders

December 2nd World Climate Summit Durban (3-4) Russian legislative elections

Autumn

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

March The 34th League of Arab States summit CMA- Shipping 2010 IMO MEPC 63

Winter

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.

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.

Liquid Natural Gas in the spotlight

Apart from getting the long term seal of approval from the oil majors, the LNG sector has been getting positive reviews from other commentators for some time. Chris Mayer wrote about how to "play the rise in LNG" in August 2010. He noted that, "last year was a big year for LNG. We saw a wave of new capacity hit the market. We had new LNG terminals take their first deliveries in 2009 -- in Kuwait, Canada, Brazil and Argentina. New facilities opened in the U.K. And China and India also imported more LNG. In the great quest to boost energy supplies, LNG could get much bigger. It makes up only 7% of natural gas supplies today, but LNG trade volumes are up 65% since 2000. Industry forecasts call for another 180% increase over the next 10 years. Nearly every big oil and gas company is upping its LNG capacity". Finishing with a flourish, Mayer goes on to say, "so how big can it get? I think it's clear there is a lot of room for growth. There are big untapped gas reserves off the coast of Africa and in the South Pacific and huge LNG expansion projects happening in Australia and Qatar. Major investments are going toward building facilities to liquefy the gas so it can be shipped to distant markets. And that's going to be a boon for the companies that supply all that goes with LNG -- the pipes, cold boxes, heat exchangers, storage systems and lots more". The tragic events unfolding in Japan may in the end add further impetus to the LNG market. With the Fukushima nuclear facility now being talked of in the same breath as Chernobyl, Japan is being forced to rethink its energy mix. Nuclear is set to lose out while LNG is in poll position to be the winner. LNG's rising stock is literally reflected in the rising share prices on LNG shipowners such as Golar LNG, Exmar and Teekay LNG. The Golar LNG share price has performed particularly strongly in recent weeks. The backlash against nuclear power may not be confined to Japan. "It took just 3 days after the Japanese earthquake and tsunami disaster for the antinuclear political backlash to begin in other countries," said Raymond James & Associates Inc. On Mar. 14, the German government instituted a 3-month moratorium on the operating life extension of the country's seven reactors that were built before 1980. Other European countries have announced reviews on their nuclear power plants. China also announced that it would suspended approval of new nuclear power stations and will carry out checks on existing reactors

Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said (Mar 21), "The nuclear crisis in Japan may prove to be a very important development for the natural gas market. World gas consumption was approximately 300 bcfd in 2010. Since there are currently about 440 nuclear reactors globally, shutting down 40 of them for safety considerations and replacing with gas would boost gas consumption by up to 7 bcfd.

The "fear factor" generated by Japan's nuclear crisis likely will undermine public acceptance of nuclear power, which is a major component in US President Barack Obama's "clean energy" policy. However, Eric Berger believes that nuclear's role within the US energy mix will continue to wane not because of fear but because of cost. He argues, "by various estimates coal is the cheapest way to boil water, followed by natural gas and then nuclear energy. I believe environmentalists will continue to have some success in blocking the construction of new coal plants, but natural gas is more palatable (with roughly half the carbon dioxide emissions of coal). Nuclear energy, of course, effectively has zero greenhouse gas emissions".

Listed Tanker Companies

Tanker share prices have remained at relatively stable but depressed levels during 1Q11. Serious over supply issues are hampering performance. The same is true for the dry bulk sector. By contrast, the container and gas sectors, which don't face the same burden of new deliveries in 2011, have been able to benefit from the gradual global economic recovery from the Great Recession. Japanese Tsunami Fails to Derail Recovery - The recovery from the Great Recession has been significantly tested during 1Q11 by the sharp rise in crude oil prices, as tension in the North Africa/Middle East oil producing region continues to boil over, and the economic aftershocks following the Japanese earthquake on Mar 11. Stock markets around the world are back to levels seen in 1H08. The exception has been Japan where the Nikkei had not yet recovered to 2008 levels when the earthquake struck and where share values fell sharply as a result of the disaster. Inflation now the greatest risk factor - It seems the Japanese economy will be able to absorb the devastating effects of the earthquake as it did following the Kobe earthquake in 1995. However, rising oil and other commodity prices are a growing risk factor which could yet derail the recovery ­ replacing fears about sovereign debt crisis in the Eurozone at the top of investors' watch lists. Oliver Jakob highlights the low confidence of investors in the stock market. "A main risk factor in equities remains the very low volume being traded. The 5-year average of daily volume in the New York Stock Exchange is half what it was in 2007. The problem with the so-called `wealth creation' of the S&P gaining 27% since the end-August announcement of QE2 [the second phase of the Fed's quantitative easing] is that the gains have been obtained with no volume and no visible risk appetite from retail investors. Now, with the oil prices starting to work against consumer confidence, it is harder and harder to see the benefit that QE will bring given that the inflation that it has created is working against the `wealth creation' of a higher S&P." This insight is behind the increased political tension in the US about the speed and depth of cuts to government spending. President Barack Obama suggested that the world could plunge into a new recession if the ceiling on money the US can borrow is not raised in the next few weeks, before the current debt limit of $14.3tn is reached. Tanker disconnect no end in sight - In recent reports, we have highlighted the underperformance of tanker shares (red line chart right) compared with general financial indices (blue line: FTSE), and crude oil prices (green line: WTI). While stock markets and commodity prices have been gradually recovering since 1Q09, tanker share prices have shown very little improvement. As a result, it will be 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 crucial that the tanker sector gets fleet supply back on track in order to reconnect with the wider markets and with investors.

Briefing Series Analysis of 4Q10 Listed Tanker Company Results

Tanker company results hit again in 4Q10 Poor 4Q10 results meant there was no respite for listed tanker companies from a damaging sequence of results going back to 4Q08. Evidence of their problems is provided by 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. The poor performance of the tanker sector is once again thrown into sharp relieve by comparison with other sectors. While dry bulk collective net profit (green line) has remained subdued, it has remained consistently in the black. Even the container sector (dark red line), which had been having a torrid time since the middle of 2008, has soared back into profit reflecting improved freight rates. Looking at individual tanker companies ­ only 8 out of the 18 listed tanker companies for which we have obtained full year results returned a profit in 2010. Ship Finance International (USD165.7Mn), Frontline (USD161.4Mn), Euronav (USD39.5Mn), Knightsbridge (USD38.6Mn), TEN (USD19.8Mn), Concordia (USD11.9Mn), DHT Maritime (USD6.5Mn) and Top Ships (USD2.5Mn) made up the first eight places in the league table of full year 2010 net profit results. Teekay was furthest adrift at the back of the pack. See the Results Page for a company by company breakdown of quarterly net profit for the last three years.

(a)

The analysis covers 18 listed tanker companies for which we have fourth quarter data

Efforts to repair balance sheets intensifies 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 are the exceptions. With the majority of companies still hemorrhaging cash and with the burden of tanker fleet over supply looking set to bring another year of poor results, a number of companies have intensified their efforts to recapitalize or to restructure their debt in recent weeks. At the end of March, Genmar announced (at the same time as revealing its 4Q results) a double cash injection (1) a secured credit agreement with Oaktree Capital Management for USD 200Mn, and (2) common stock offering aiming to raise around USD50Mn. In mid April, D/S Torm announced a rights issue with a view to raising USD100Mn. Not all recapitalization efforts have proved successful with DHT

Maritime suspending a planned bond towards the end of March due to unreceptive market conditions. Companies that have recently restructured their debt include Omega Navigation, which announced in mid April that it had reached an agreement with its lenders to amend the maturity date of both the current senior and junior loan facilities, and Top Ships, which announced in early April that it had obtained a waiver from Alpha Bank until February 28, 2012 in relation to the breach of certain financial covenants under the Alpha Bank credit facility. With most tanker companies forced to take defensive measures over recent months, there is a sense that timing is running out for some of the weaker companies and that some might not be able to withstand another year of poor results as they wait for the market to recover. Some tanker companies ­ while acknowledging the difficult market conditions ­ have stressed that progress is being made on controlling costs and on other defensive strategies(b). OSG - Morten Arntzen, President and CEO, said, "2010 was clearly a disappointing year financially as a result of very depressed rates in all tanker segments in the last two quarters of the year. Nevertheless, we made substantial progress on a number of fronts that will benefit the Company in 2011 and beyond. We made further strides forward in our G&A reduction campaign; we kept ship operating costs in check; we put the two state-of-the-art FSOs we have in joint venture with Euronav to work in Qatar on longterm charters; we equipped our U.S. Flag business unit with the assets, contracts and cost base to return to profitability; and we continued to enhance our already strong commercial platforms." Arntzen added, "We will continue to focus on internal actions that can enhance our competitive position and improve our margins in 2011. With critical mass in our three main businesses, Crude, International Products and U.S. Flag, in 2011 we will concentrate on flawless execution of our balanced growth strategy." Frontline - In 2010, Frontline secured approximately USD640Mn in new capital, committed new bank financing and release of restricted cash. The Company also re-negotiated the newbuilding program and managed to reduce the program in 2009 and 2010 with net USD476Mn. Furthermore, sale of vessels and shares in 2011, have generated additional USD84Mn in cash after repayment of debt. Teekay Tankers - "Despite the weak spot tanker rates in the fourth quarter, we were able to pay a relatively healthy dividend as a result of having approximately 70 percent of our fourth quarter revenue generated from fixed-rate time-charter contracts and our investment in two VLCC loans," commented Bjorn Moller, Teekay Tankers' Chief Executive Officer. "With the potential for continued spot tanker market weakness in 2011, we have tactically managed our fleet employment mix such that over 50 percent of our vessel operating days for the year are covered under fixed-rate charters earning a weighted average time-charter rate of approximately USD24,500pd." Mr. Moller continued, "Including the proceeds from our recent equity offering, Teekay Tankers' balance sheet is strong and with almost USD300Mn of available liquidity, we are well positioned to take advantage of attractive vessel acquisition opportunities." Teekay - "In the current tanker market, our diversified, predominantly fixed-rate business model has proved to be a significant advantage. Looking back at 2010, we are pleased with the performance of our fixed-rate businesses, with over USD660Mn of fixed-rate cash flow from vessel operations generated, an 18 percent increase over the previous year," said Bjorn Moller, Teekay Corporation's President and Chief Executive Officer. In addition, we have continued to manage our costs and reduce our exposure to the volatile spot tanker market through redelivery of in-charters, out-chartering of spot traded vessels and the sale of spot assets."

(b) Paying down debt is the most obvious way to strengthen the balance sheet. In addition to paying down debt, shipowners have a whole range of other defensive strategies in their armory to protect their balance sheets:

-

Cost Cutting Enhance Cash Flows through Long Term Timecharters Sell Vessels Cancel Newbuidlings Suspend Dividend Renegotiate Finance Raise Equity from Shareholders Increase value to Shareholders through Stock Buyback

Results Page: Listed Tanker Companies ­ Results 4Q10

Brostrom delisted 27 Feb 2009

(240 x 240)

USSP emerges from bankruptcy Nov 2009

Results Page: Listed Tanker Companies ­ Market Cap v Debt 4Q10

Intentionally blank

orange line = market capitalization, blue line = debt

As it happened Appendices Chronology of Oil Market Events JanuaryApril 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 What a Democratic Presidency Means for US Energy Policy Oil Industry Rationalisation Shipping News

Chronology of Oil Market Events January-April 2011 ­ and

how the oil price was influenced

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.

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

Eurozone fears persist QE2 injects some confidence.

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

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

Apr 27 USD

­ UK GDP grows by 0.5% in 1Q11 ­ this UK narrowly avoids a double dip

recession. S&P cuts alarm about debt burden. Apr 26 USD111.6 ­

Japan's ratings outlook to negative

as sounds fresh

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.

own exit.

President of Yemen tries to engineer his

Apr 21 USD111.69 ­ Apr 20 USD110.81

­ Strong US corporate earnings from tech sector and steady improvement in US housing

Apr 19 USD107.13 ­ The preliminary results of Nigeria's presidential elections point to a victory for the incumbent, President Goodluck Jonathan, heightening the chance of policy continuity. However, the question remains whether all Nigerians respect the victory Marc Ground at Standard New York Securities Inc., the Standard Bank Group, reported,

defend for QE3,"

Eurozone debt crisis is worsening and threatens the nascent economic recovery in that region is also adding to the less optimistic outlook. Meanwhile, ongoing concerns over the impact from further Chinese monetary tightening are also weighing on sentiment." Oliver Jakob said, "The S&P downgrade could make the case harder to

"The (S&P) announcement has shaken financial markets' confidence in the US economic recovery and sent the dollar reeling. Lingering fears that the

the third phase of the US Federal Reserve System's "quantitative easing" program to stimulate the economy. He said, "A significant amount of speculative length has come into crude oil on the QE theme, and if convictions start to increase that QE3 will not be able to fly [with investors unwilling to buy Treasury bonds], then we should expect that some of the speculative positions in crude oil will be reduced. Once the weekly statistics are digested, the oil markets are likely to start positioning themselves for the Federal Open Market Committee (FOMC) meeting of next week."

Apr 18 USD106.6 ­ Concern that Libyan crisis starting to look intractable and ugly with Gadaffi using cluster bombs. Saudi Arabia Oil Minister Ali I. Al-Naimi said the global oil market is oversupplied. Analysts at the Centre for Global Energy Studies (CGES), London, said, "Oil prices [generally] are rising to levels that are beginning to affect demand, yet the world is being told once again that markets remain `well-supplied' with crude and that the upward march of prices does `not reflect the realities of supply and demand.'" Members of the Organization of Petroleum Exporting Countries have not replaced oil production lost to the conflict in Libya, leaving a shortage of 1Mnbd last month. "If OPEC will not raise supply to balance the market, demand will have to come down eventually, which will only be achieved by a repeat of the record prices of 2008," CGES analysts predicted At KBC Energy Economics, a division of KBC Advanced Technologies PLC, analysts said, "Oil prices were driven by the battle of two financial titans over the past few days. While Goldman Sachs asked its clients to get out of commodity markets, Barclays Capital remained bullish and criticized those who are just trying to raise the attention of the `petroleum paparazzi.'" RGE flags renewed concerns with Spain's sovereign debt While affirming its `AAA/A-1+' sovereign credit rating for the US,

S&P has

revised its US outlook to negative

because it says, "the U.S. has, relative to its `AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable ·We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer `AAA' sovereigns. More unrest in Syria and Yemen. Apr 15 USD109.12

­ China 1Q11 GDP grew faster than expected at

but inflation 5.4% stands at three years high. The FT.com commented that the stronger than expected readings came despite six months of tightening efforts in which the government has raised benchmark interest rates four times. Beijing has also increased the ratio of deposits that banks must hold in reserve six times, to 20 per cent for China's largest lenders. "Despite the most aggressive period of tightening in years the government cannot seem to slow the economy down," said Alistair Thornton, an economist at IHS Global Insight. "Beijing has had to regularly revert to heavy-handed administrative measures, such as direct price controls in the food sector and limits on house purchases in the property market in order to contain inflationary pressure." Many economists said the data showed that the economy had not slowed meaningfully, and that Beijing would likely continue its tightening efforts to rein in excess liquidity and slow rapid price rises that the Communist party fears could damage social stability. The US Department of Labor unexpectedly reported Apr. 14 weekly jobless claim reports numbers rose by 27,000 to 412,000--the highest in 2 months.

Apr 14 USD107.68 ­ China hosts 3 annual BRICS meeting. Greek debt refinancing giving cause for concern. Moody's downgrades Ireland's credit rating two grades to Baa3 Apr 13 USD106.15 ­ EIA reported commercial US inventories of crude increased 1.6MnBbls to 359.3MnBbls in the week ended Apr 8, exceeding the Wall Street consensus for a 1Mnbbl build. However product stocks have moved decisively below the five year average indicating that refinery runs must increase. Analysts at Barclays Capital Commodities Research do

rd

9.7%,

not believe that oil prices are high enough to seriously start the process of crude oil demand destruction, but considers $4 gallon for petrol to be

an important psychological barrier in the US. Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, said, "It is too early to call a top to crude oil prices, in our view. The market remains far from any equilibrium, supply losses have not been made good, geopolitical risk remains elevated, spare capacity is still falling, and the very limited movement along the demand curve in response to higher prices has thus far been an order of magnitude less than the supply side outages." Apr 12 USD105.7

­ Japan revises Fukushima nuclear disaster to same level as Chernobyl. The highest level on the international scale. IEA reports

that Saudi Arabia's response to the loss of 1Mnbd of Libyan exports was to throttle back production from mid March. The IEA cited factors beyond the kingdom's control for its muted response. "The

[March 11] earthquake and tsunami that devastated north-eastern Japan reduced overall demand for the country's crude," the IEA report said. "A number of cargoes en route to Japan were diverted elsewhere in the region." In addition, Saudi Arabia's national oil company has found it difficult to replace the high-quality blend of Libyan crude. "Saudi Aramco saw only tepid demand from refiners for extra barrels due to the quality mismatch with lost Libyan supplies," the report said. Amrita Sen, commodities analyst at Barclays Capital, cautioned that the IEA's Saudi production data could be revised upwards, but agreed there had been a "lukewarm" response from refiners to the variety of crude the kingdom had offered to replace Libyan supply. Apr 11 USD109.31 ­ Violence reported ahead of Nigerian presidential elections. Signal that Libyan peace talks may be on the cards. Apr

preliminary details of Portugal's future EU/IMF bailout package have been agreed between Portugal's caretaker

8 USD112.22 ­ The government and EU finance ministers, with the package likely to total 80 Bn and designed to stabilize Portugal's banking sector and finance the sovereign Raymond James & Associates Inc argue turmoil in Libya and the Middle East continues to overshadow demand concerns. Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, "We believe Libya will be out of the oil markets for the medium term. Furthermore, we view underlying oil supply and demand fundamentals as tight, with inventories trending lower and spare capacity being squeezed. This portends further upside in high oil prices in our view."

Apr 7 USD109.77 ­ Eurozone interest rates have been raised to 1.25% from the record low of 1% by the European Central Bank (ECB).

It is the first time the ECB has raised interest rates since 2008 Oliver Jakob said, "Politicians from

Asia to Europe are starting to panic about energy prices. Despite the expectations of the European Central Bank increasing interest rates [on Apr. 7], the euro is still weaker than in the summer of 2008 and that means that Brent in euro/bbl really compares to levels of $132/bbl in 2008." According to the Office for National Statistics, UK industrial production (IP) declined by 1.2% m/m in February, the biggest fall since mid-2009, with headline IP hurt by sharp falls in oil and gas extraction. Saudi and UK ministerial meetings discusses the unhealthy role played by speculators in pushing up oil prices. EIA reported that commercial US benchmark crude inventories increased by 2MnBbls to 357.7MnBbls in the week ended Apr 1, matching the Wall Street consensus. Apr 6 USD108.33 ­ Oil production from Gabon has ground to a halt.

bailout.

Portugal to seek EU

Apr 5 USD107.77 ­ As anticipated by RGE, the People's Bank of China hiked the one-year policy rates by 25 basis points, the fourth such increase since September 2010, in an ongoing attempt to stem rising inflation. Apr 4 USD108.09 ­ US unemployment rate dropped one tenth of a percentage point to 8.9% in February. China's government reported manufacturing growth. The March Purchasing Managers Index (PMI) was 53.4, indicating slightly accelerated factory activity compared with a February PMI of 52.2. Apr 1 USD107.5 ­ The latest banking stress tests carried out by the Central Bank of Ireland have revealed recapitalization needs of an additional 24Bn for Irish banks, effectively bringing the Bank of Ireland and Irish Life and Permanent under state control. Mar 31 USD106.14 ­ S&P downgrades Portugal to BBBEIA earlier said commercial US crude inventories were up 2.9Mnbbls to 355.7MnBbls in the week ended Mar 25, exceeding the Wall Street consensus for a gain of 1.5MnBbls

A survey by a Japanese financial research firm found that confidence in the manufacturing sector has fallen faster than ever before, and Australian finance minister Wayne

Swan warned of the impact on exports of coal and iron ore.

Mar 30 USD103.75 ­ Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, remains bullish about oil, however. "Converging financial, fundamental, and geopolitical trends suggest that oil prices will be well supported with risk to the upside. We expect crude oil prices to average well above $100/bbl in 2011, with Brent prices ranging between $115-125/bbl out to 2015," he said. Mar 29 USD104.29 ­ Libyan opposition announces plan to export oil as rebels gain control of main export terminal. Oliver Jakob "Bombs continue to fall on Libya and radiation to fall on Japan," Mar 28 USD104.1 ­ The British government's proposed new tax on the country's oil and gas industry has come under heavy criticism from a leading trade association, as well as opposition politicians. Mar 25 USD104.84 ­ Unrest in the Middle East and North Africa (MENA) region remains the major influence on oil markets. Olivier Jakob at Petromatrix, Zug, Switzerland, said, "It is very likely that today will turn out very violent in Yemen and maybe too in Syria, but this is starting to be a weekly routine for oil markets, and an additional geopolitical premium will require a greater fear that revolts may spread to Saudi Arabia." So far, the Saudi kingdom has been able to pacify its citizens "despite a few small protests." According to RGE, there is little incentive for the Bank of Japan to sell its foreign assets (such as US Treasurys) to fund reconstruction, owing to a continuing current account surplus, impending private sector repatriation flows and the ability to simply print more yen in the short term NATO agrees to take control of the no ­fly zone over Libya Mar 24 USD104.99 ­ Traders "had plenty to react to including continued fears regarding Middle East supply disruptions, concerns of retaliation following a bombing in Israel, and a mixed EIA inventory report showing a largerthan-expected build in crude inventories," said Raymond James & Associates Inc. Mar 23 USD105.16 ­ Fear that Libyan oil infrastructure may be destroyed. Eurozone finance ministers have agreed on the details of a European Stability Mechanism (ESM) agreement, following an initial agreement on March 11; the ESM will have the lending capacity of 500Bn, backed up by a 700Bn capital base Saudi Arabia has announced additional stimulus measures, focused on health and education spending, following the initial stimulus rolled out in February to quell civil unrest and boost growth. Mar 22 USD104.51 ­ Russia's Deputy Prime Minister Igor Sechin said his country is already boosting energy supplies to Japan and that it plans to double oil exports and increase oil product supply in 2011. "Oil exports to Japan will double in 2011 to 18MnTons," said Sechin, who added that Russian exports of oil products to Japan would grow to 4.5MnTons from the current 3.5MnTons. ExxonMobil Corp.'s Shiogama Terminal in Sendai, which reopened on Mar. 20, has received its first tanker shipment of muchneeded fuel, including 2 million l. of gasoline, light oil, and kerosine. Permanent or long term closures of damaged Japanese nuclear reactors is estimated to remove 8% of Japan's electricity generating capability. More support for the idea that LNG is likely to be the main winner from IHS-Cera commenting that, "Global LNG markets have sufficient flexibility to allow for sending additional cargoes to Japan, the world's largest LNG importer, most likely diverted from destinations in Northwest Europe." Supplying 50% of lost nuclear and coal-fired power generation would require an additional 12 LNG cargoes/month or about 9 tonnes annualized--a 13% increase over previous Japanese imports, said IHS-CERA analysts. "However, it is possible that some of the affected coal capacity will be brought back online within 12 months, reducing the annual need," they said. Although liquefaction capacity utilization has been tight in recent months, IHS-CERA said, "The global market is entering the traditionally lower-demand portion of the year, and additional cargoes could be made available. However, additional cargoes will represent a small portion of incremental demand in Japan. The majority of cargoes will be diverted from elsewhere, with Northwest Europe the most likely source market. Increased demand in Japan represents a reallotment rather than an increase in this amount of flexible supply." In turn, European buyers will have to tap other gas resources to replace diverted LNG. "Although the European market is well supplied by pipeline gas, the sustained diversion of LNG will tend to push spot prices toward long-term oil-indexed levels," IHS-CERA analysts predicted. Additional demand for oil for power generation likely won't have much impact on global oil prices, however, as reduced transport and industrial demand will more than offset the power generation call until Japan partially recovers from the earthquake and tsunami damage, they said. CGES analysts said, "This is the heart of the problem that the oil market faces at the moment. Buyers clearly want more oil from OPEC than it is currently producing, yet those with spare capacity seem to be doing very little. Furthermore, what they are doing is far from clear, at a time when the market desperately needs transparency from the world's swing producers." Mar 21 USD102.34 ­

Mar 20 UN begins efforts to enforce no-fly zone with French fighters The FTCC report that the People's Bank of China leading the first attack

(PBoC), the central bank, has stepped up efforts to mop up liquidity in the face of rising inflation by raising the reserve required ratio (RRR) by a further 50 basis points, effective March 25. The move was combined with a buyback of Rmb 220bn in central bank bills as well as a net withdrawal of Rmb 49bn through open market operations this week, reversing a trend of liquidity injections that have persisted for sixteen consecutive weeks. This is the third time this year and the sixth time since November that the PBoC has hiked RRR pushing the ratio to 20% among the country's biggest banks. It is expected to hold back around Rmb 350bn of cash that otherwise could have been lent out. Could Gas be the main beneficiary of global rebalancing of the energy mix after Fukushima Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, "The nuclear crisis in Japan may prove to be a very important development for the natural gas market. World gas consumption was approximately 300 bcfd in 2010. Since there are currently about 440 nuclear reactors globally,

shutting down 40 of them for safety considerations and replacing with gas would boost gas consumption by up to 7 bcfd. Moreover, he said, "As much as 1.4 million b/d of refining capacity in Japan has been disrupted as a result of the quake, of which we anticipate 555,000 b/d may remain offline for an extended period of time. We believe this will be bullish for regional gas oil markets given Japan's status as a net exporter of gas oil." Fukushima reactors still

giving cause for concern.

Autorite de Surete Nucleaire (ASN), the French nuclear safety authority, has ranked the Japanese nuclear crisis at Level 6 on the international scale of 1-7. The 1979 accidental release of radiation from the Three Mile Island plant in the US was rated Level 5. The only Level 7 rating so far was the deadly Chernobyl disaster in the Ukraine in 1986. Mar 18 USD101.04 ­ Liam Halligan Chief Economist at Prosperity Capital Management ­ "It was the 1995 Kobe earthquake which led indirectly to the collapse of Barings, as "rogue trader" Nick Leeson upped his bets on Japan to avoid discovery of his growing losses. Some investors will no doubt see this disaster, and the "unknown unknowns" which may result, hard on the heels of Arab unrest and rocketing oil prices, as one uncertainty too many. That's why some big economies, including the US and the UK, are now jointly intervening to weaken the yen. Just as in 1995, this latest Japanese earthquake has caused its currency to surge. That may sound strange, given that the country's productive capacity has been hit. But the yen has just climbed to post-war high against the dollar, as markets foresee cash repatriation following big sales of Japanese assets overseas, not least by insurers, to pay for reconstruction. Japan has sovereign debts equal to 200pc of GDP. But 95pc of those IOUs are held by Japanese institutions and households. In terms of its balance sheet with the rest of the world, Japan is a huge creditor. And therein lies the rub. During the immediate aftermath of this earthquake, global financial markets followed their well-rehearsed "emergency drill", which led to the usual net buying of "safe haven" assets like US Treasuries. A realization is now dawning, though, that if Japan starts cashing in some of its vast USD980Bn stock of American government debt, the market for Treasuries could take a serious hit, causing the US government's borrowing costs to escalate, together with those of other Western nations. Traders estimate that more than USD25Bn has been spent in

recent days by the G7 economies, reportedly to bring down the yen, and help Japan's recovery effort. The Japanese people are no doubt grateful. The fact that this is G7 currency initiative, though,

a body that doesn't include China and the world's other large net creditors, won't be lost on the Japanese authorities. They will be well aware, as should we be, that this currency intervention is driven almost entirely by Western financial self-interest Oliver Jakob also noted "an additional twist overnight" as the G7 [industrialized nations: Canada, France, Germany, Italy, Japan, UK, and US] decided on coordinated intervention to weaken the Japanese Yen. "While intervention from the Bank of Japan was expected, a coordinated intervention was a surprise and was the first in many years," he said. "The volatility in currencies [on Mar. 16] was not helped by some market makers that decided to pull the plug and not to make a market anymore (a bit similar to what happened last May during the `flash crash'). 40

killed as Yemen government suppresses protestors ­ suggestion that snippers used.

Mar 17 USD101.45 ­ Energy markets continue to be caught between MENA turmoil and Japanese crisis but sentiment turning more positive. Adam Sieminski, chief energy economist, Deutsche Bank AG, Washington, DC, said, "Event risk is building in the oil market as Gulf Cooperation Council troops have moved into Bahrain and the UN approves a no-fly zone across Libya. This is occurring at a time where spare capacity in Saudi Arabia is falling rapidly. Liquidity injections in Japan should ensure the negative impact on gross domestic product will be relatively modest. We therefore view events as bullish crude oil." Paul Horsnell, managing director and head of commodities research at Barclays Capital in London, noted, "The situations in Libya and Bahrain have intensified significantly over the past week. The apparent move into a military endgame in Libya...is likely to represent the most immediate source of upside price risk for oil. However, in the longer term, in our view, the passage of events in Bahrain may prove to be a more profound development." Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, "Continued unrest in the Middle East will be a driver for oil prices in the near-team, outweighing the concerns that Japanese demand for crude could be curtailed for an extended period of time as well as China's central bank moving to cool economic growth." An alternative view comes from Nouriel Roubini who argues the systemic breakdown of the Fukushima 1 nuclear plant and cascade of other effects following Japan's March 11 earthquake mean that the boost from reconstruction efforts will not outweigh the economic damage wrought by the earthquake in the year following the disaster US housing starts collapsed in February but slight increase in builder confidence detected The Japanese government, confirming earlier reports, will urge utilities to increase output at fossil fuel-fired electric power plants to boost power shortages. Japan's refining capacity remains down 25% due to suspended operations at five refineries in the Tohoku and Kanto regions. Mar 16 USD97.97 ­ Conditions of Fukushima nuclear plant show slight improvement followed by further setbacks. Investors in wait and see mode. However, James Zhang at Standard New York Securities Inc., "It's highly likely global economic growth will be lower than previously thought due to the loss of production caused by the quake, as Japan represents more than 8% of global gross domestic product and is a major trading partner for many other economies." By contrast Oliver Jakob commented, "We remain cautious ..... until a clearer picture emerges out of Daiichi that things are under control." Japan announced a release of 8.9MnBbls of oil from its strategic reserve, which is held by private companies as mandatory stocks. Some airlines decide not to fly to Tokyo. It may be that some shipowners will suspend trading to Japanese ports. The EIA reported commercial US crude inventories increased 1.7MnBbls to 350.6MnBbls in the week ended Mar 11, surpassing the Wall Street consensus for a 1.3MnBbbls gain Upheavel around the world ­ not to mention falling oil prices ­ have left OPEC hinting that they may convene an extraordinary meeting.

Mar 15 USD97.21

which ensures demand destruction in the short term + fears about radiation have made investors very nervous with third explosion at Fukushima. This nervousness has

level 5 ­ the same as Three-Mile Island) more than offset the positive impact on oil prices of dislocation in the oil tanker market caused by the loss of Libyan oil production and the continuing unrest across North Africa and the Middle East. It is calculated that Japan has lost 1.3Mnbd of crude oil refining capacity. Sharp drop in US consumer confidence reported by the University of Michigan. The IEA anticipate that it will be many months before Libyan oil production returns to normal levels as the prospect of a long civil war becomes reality. IEA also confirmed that Saudi Arabia, Kuwait and UAE had increased production to offset lost Libyan production. Saudi Army moves

­ Scale of Japanese disaster (now

rated at nuclear

into Bahrain to suppress demonstrations

(Oliver Jakob commented - the protestors didn't go to Saudi Arabia on the day of rage ­ instead the Saudis went to the protestors)

LNG and Coal to replace nuclear in the short term

­ As Japan continues a cycle of rolling black outs energy producers are competing to take advantage of the energy shortfall caused by the Fukushima nuclear crisis and other power plant closures caused by the earthquake/tsunami. Russia's Prime Minister Vladimir Putin has ordered officials to accelerate development of the OAO Rosneft-led Sakhalin-3 oil and gas project to help meet projected demand coming from Japan. "It is obvious that this is a long-term loss of generation so we need to think how to speed up plans for developing hydrocarbon production including gas in the Far East," said Putin, adding, "I have in mind the Sakhalin-3 project." Putin was not alone in recognizing Japan's need--or the effect of that need--for alternative sources of energy to replace supply from nuclear reactors that were damaged or shut in the aftermath of last week's earthquake. "Qatargas stands ready to provide all the support to its long-term partners and foundation customers in Japan to meet any increased requirements for LNG at this time," said a Qatargas spokesperson. Royal Dutch Shell PLC Chief Executive Peter Voser said his company was already working with the Japanese government to divert energy cargos to Japan, with one delivery of LNG made in the Tokyo Bay area on Mar 14 under difficult conditions. Coal suppliers are also standing by. Indonesia, which is the world's largest exporter of thermal coal, said it stands ready to provide additional coal to Japan to meet an expected surge in demand Dileep Srivastava, a director of PT Bumi Resources, Asia's top thermal coal exporter, said he expects to see coal prices and demand rising in the medium term following the earthquake. Indonesia expects to produce 340 million tonnes of coal this year, up from an estimated 310 million tonnes in 2010 as miners increase production on higher prices. Crude

oil will also have a place in the revised energy mix.

Japan is likely to turn to oil--mainly low-sulfur fuel oil or low-sulfur crudes--as replacement power-generation fuel, with Barclays Capital estimating that 200,000 b/d of oil would be needed. "Right now, it's not clear how much fuel oil they are going to buy, but it is quite certain that they will, and in large volumes," said a Singapore-based Japanese trader. There is no doubt that Japan is in urgent need to import coal, LNG and oil products to restore energy consumption, but damaged storage tanks, ports and refineries render the country incapable of absorbing all the fuel and raw materials foreign suppliers might want to rush in.

Mar 14 USD101.18 ­ Gadaffi puts pressure on IOCs. "Libyan oil terminals have become safe," Libya's state-owned National Oil Co. said over national television. "All employees are asked to return to their jobs in all oil facilities. And we urge [foreign] firms to send their tankers to load and unload." Also looking for international help to fight fire at kerosene storage unit in Ras Lanuf. The rebels have received help from the Persian Gulf, with one fuel tanker from Qatar docking in Benghazi last week, and promises of more from the UAE.

at Fukushima runs into difficulties.

Mar 11 USD101.12

Japanese nuclear facility

France failed to get G8 to agree to Libyan nofly zone

­ Tsunami 9.0 hits Japan. Yen holding up

but frailty of global economy mean investors fear a return to recession.

Libya oil output cut by 1.4Mnbd as Gadaffi fights back claiming to

have retaken Ras Lanuf. Tankers heading to Saudi Arabia looking for work. Saudi Arabia's "day of rage" did not materialize due to a heavy police presence.

Mar 10 USD102.71 ­ Moodys downgrades Spain's credit rating. Highly ineffectual discussion within international community about no-fly zone as it looks like Gadaffi will eventually retake rebel territory. Mar 9 USD104.97 ­ Libyan civil war intensifies with oil facilities coming under bombardment. Libyan lost production at estimated at 1Mnbd. Saudi claims 3.5Mnbd spare production but higher sulfur content than Libya crude. Saudi claims to be working on a low sulphur version of its crude. The EIA reported commercial US crude inventories gained 2.5MnBbls to 348.9MnBbls in the week ended Mar 4, outstripping the consensus est of a 1MnBbls increase. The "days of rage" sweeping through the Middle East and North Africa (MENA) have raised questions about the possibility of a similar movement erupting in China. At a glance, the ingredients for uprising appear to be present. Online calls for a "Jasmine Revolution" in China resulted in a massive staging of security forces at the planned protest sites, which could be taken as a sign of the Communist Party's insecure grip on power.

Mar 8 USD105.04 ­ Indication that US Government might release reserves from the SPR. The US EIA in its latest short-term energy outlook raised its forecast for the average 2011 cost of crude for refiners by USD14Bbl from its previous outlook to USD105Bbl as a result of continuing North Africa and MEast tension The Index of Small Business Optimism, compiled by the National Federation of Independent Business, rose 0.4 point in February to reach 94.5 Mar 7 USD105.35 ­ James Zhang at Standard New York Securities Inc., "The risk of a prolonged civil war in Libya has increased. Elsewhere in the region, protests in Bahrain and Oman show no sign of abating, while protests in Egypt reerupted over the weekend. With these developments, Oman reshuffled its cabinet for the second time in a week, while Saudi Arabia imposed a ban on all protests. Overall, the political situation in the Middle East and North Africa (MENA) has deteriorated over the past few days." Mar 4 USD104.32 ­ Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, "So far, the market is seeing the current surge in prices as temporary spike rather than a structural shift. However, the prices have reached levels [that] could knock the recovery back, and we could start to see the effect of rising crude prices in the economic data over the coming months if crude remains elevated over a protracted period." Mar 3 USD101.9 ­ EIA earlier reported commercial US crude inventories dropped 400,000 bbl to 346.4Mnbbls in the same week. Mar 2 USD102.25 ­ The HSBC/Markit PMI for February 2011 slipped to a seven-month low of 51.7, while the official China Federation of Logistics and Purchasing PMI eased to 52.2 from 52.9 in January, pointing to a slowdown. Barclays Capital analysts point to Algeria as the next country in line for destabilization, while Nigeria's looming elections on April 9 mark it out as another source of potential crude oil supply disruption. Great fear is that Saudi Arabia could succumb to disorder. Discontent in Oman, Iraq and Iran rumbles on. Mar 1 USD99.61 ­ Saudi Arabia again pledged to make up the shortfall in Libyan production. Olivier Jakob at Petromatrix, Zug, Switzerland, said, "The Saudi unilateral decision to increase supplies also implies that the Organization of Petroleum Exporting Countries' quotas are de facto written off, and Kuwait has already started giving signs that it will likely follow the steps of Saudi Arabia. At current prices it makes sense for both Kuwait and the UAE to also increase supplies rather than stay idle and watch Saudi Arabia increase its market share." Gadaffi fights back against own people in Libya retaking some

Higher oil prices threatening to drag down global economy.

oil installations.

Feb 28 USD97.3 ­ On Feb 26, militants in northern Iraq detonated several bombs and attacked guards at the country's largest refinery, killing four people and damaging the 310,000-b/d Baiji facility. Feb 25 USD96.47 ­ UN security council to meet to discuss sanctions against Gaddafi. The Middle East awaits Obama's move. Combination of weather and violence bring Libya's oil ports to virtua lstandstill. UK 4Q10 GDP figure revised down from -0.5% to -0.6%. Greatest weekly gain for last two years. Feb 24 USD95.58 ­ FT CC argues that China on top of over-heating by curbing bank lending but inflation becoming structural. New US home sales in January 2011 fell back sharply, down 12.6% m/m to 284,000, only 3.6% above the series record low reached in August 2010. Rumours

Gadaffi shot unfounded.

Due to the continued violence sweeping the country,

Libya's oil production has decreased by 75%

increase production.

to around 400,000 b/d from the normal 1.6 million b/d, according to Paolo Scaroni, Eni SPA chief executive officer. Saudi Arabia and other OPEC hinted that prepared to

But not everyone convinced. Oliver Jakob noted, "Saudi Arabia had said that they would increase production when a supply disruption starts to develop. The supply disruption is occurring; Saudi Arabia is for now staying silent, hence the market has to price the second solver which is lower demand, and lower demand comes through price demand destruction. The price surge of 2008 was quite effective for demand destruction, but the process can be quite harmful and long lasting. Forecasts for oil to reach $200/bbl are starting to surface and if oil can go ballistic on any further fire in the Middle East, the aftermath will probably be dramatic for the world economy." Nouriel Roubini raises the spectre of stagflation. Political contagion across the Middle East has already resulted in economic fallout, and while the impact of developing situations in afflicted countries on world markets is complex, one possible outcome is global stagflation, a combination of rising inflation and recession Feb 23 USD95.54 ­ Gaddafi still hanging on in Libya ­ threat to Libya crude oil exports. "Unlike the Egyptian situation a few weeks ago, disruptions to crude oil supply are now a reality, with many Libyan oil fields and ports shut. The turmoil in Libya is unlikely to ease any time soon, as [strongman Moammar Gadhafi] has vowed to fight on. Furthermore, the contagion risk for political instability to other countries in this region remains high," said James Zhang at Standard New York Securities Inc., the Standard Bank Group. Feb 22 USD92.62 ­ At Barclays Capital Commodities Research, analysts reported, "Two issues are likely to drive investment performance over the coming months. First, we expect unrest in the Middle East to cause volatility in prices, although we do not think it will limit oil supply significantly; second, we expect the strong cash position of the

industry to support rising organic and inorganic spending. Given these factors, we see sustained high oil and rising coal prices and expect long-term outperformance from oil-leveraged exploration and production companies and oil service names in both equities and credit. These are the same investment calls we made 6 months ago, but valuations no longer benefit from the large post-Macondo discount, so we expect outperformance to be more moderate." Citing Japan's rising debt levels and weak governmental response, Moody's has downgraded Japan's long-term sovereign debt rating outlook to negative from stable. Feb 21 USD90.22 ­ In a communique following the February 18-19 meeting, G20 finance ministers announced that they had agreed on indicators that would identify unsustainable imbalances. Reports have circulated that Portugal may require an external financial rescue package by April, giving rise to increased concern among EU officials. Feb 18 USD85 ­ The People's Bank of China raised banks' required reserve ratios to a record 19.5% for the largest banks, in the fifth upward adjustment in five months--in an attempt to tamp rising inflation. Feb 17 USD85.02 ­ Feb 16 USD83.77 ­ FT CC The prices of most vegetables on sale in China's largest wholesale market have fallen significantly in recent days, suggesting that the forces that drove food prices to surge 10.3% year on year in January may be moderating somewhat. Bank of England indicates that it may increase interest rates. U.S. retail sales gained a modest 0.3% m/m in January, after 0.5% and 0.8% gains in December and November, respectively Feb 15 USD83.1 ­ Tension rising in other Middle Eastern countries e.g. protestor killed in Bahrain. The global oil burden in 2010 was the second-highest following a major recession and could rise this year to levels close to those that have coincided in the past with marked economic slowdowns, warns the International Energy Agency in its latest monthly oil market report. Feb 14 USD83.63 ­ Mubarak goes late Friday ­ but Egypt not out of the woods as army declines to had over control to civilian government. Obama proposed USD1100Bn budget cuts over the next decade. Massive cuts over long time period in contrast to UK approach. Feb 11 USD84.36 ­ Despite Mubarek's defiance signs that he will go, but the week ends with Egypt in limbo. Feb 10 USD85.41 ­ Mubarek clings to power The widening WTI/Brent spread means that US motorists are paying at the pump the same price as in early 2008, while the European consumer is paying the same price as in the summer of 2008. Meanwhile the Chinese are paying the highest price ever. Feb 9 USD85.56 ­ WTI discount to Brent hits a new high of USD13.05Bbl. China increases interest rates again indicating over heating fears persist. The EIA reported US inventories increased 1.9Mnbbls to 345.1MnBbls in the week ended Feb 4. That was just below the Wall Street consensus for a 2MnBbls build. As a severe drought persists across China's wheat-producing regions, the State Council has pledged to increase subsidies for wheat, rice and grain production; boost spending on agriculture infrastructure projects; and raise the minimum price for government grain purchases to encourage production. The Bundesbank reported that Germany's current account balance showed a 129.9Bn surplus in 2010, buoyed by export growth of 0.5% m/m in December, though slowing global demand is expected to dampen export growth in 2011

Worldwide oil demand will increase by 1.5Mnbd in 2011 and by 1.6Mnbd in 2012, with continued tightening of global oil markets

over the next 2 years, EIA said in its latest Short-Term Energy Outlook (STEO). In its previous STEO, released a month ago, EIA forecast this year's global oil demand growth at 1.4Mnbd.

Feb 8 USD85.82 ­ In December 2010, the Japanese current account widened 30.5% y/y to 1.195 trillion yen (USD14.5Bn) as export growth outweighed imports and improvements were made in the income and goods and services account. Feb 7 USD86.27 ­ Egypt rolls on, some suggestion that moment for demonstrators has passed. The decline in the unemployment rate to 9% reflects a labor force participation rate at its lowest level since 1984. Strong demand from China, Japan and the EU, predicted inventory interruptions in Australia and an investor trend toward using commodities as an inflation hedge all combined to push copper prices to a record intraday high of US$10,000 a metric ton on February 3. Feb 4 USD87.84 ­ According to RGE the German government appears to be softening its position toward extending both the size and scope of the European Financial Stability Facility (EFSF) bailout fund in return for the introduction of tough, new pan-eurozone economic cold weather swept the US causing iced highways and rolling power blackouts on the Gulf Coast

reforms

Feb 3 USD89.39 ­ Egyptian street battles. Brent over USD102Bbl. S&P is continuing its gradual downgrade of Irish sovereign debt, and on February 2 the agency lowered the country's rating to A- from A, keeping it on negative watch FT CC China's commented "sprawling network of underground banks, which is feeling the effects of a

shortage of liquidity within the formal financial system, is raising lending rates, squeezing small and medium enterprises (SMEs). We think the signs of SME distress highlight the vulnerability of private enterprises - a big beneficiary of two years of loose money - to Beijing's ongoing monetary tightening" The EIA reported commercial US crude inventories increased by 2.6MnBbls to 343.2MnBbls in the week ended Jan 28. That is above average for this time of year and slightly more than the Wall Street consensus for a 2.5MnBbls gain. Analysts at IHS CERA Inc. said, "The political upheaval in Egypt has provoked anxiety in oil markets, which are always fearful of any threat to big energy exporters in North Africa and to even bigger ones clustered in the [Persian] Gulf. Yet market reaction has been restrained, a notable response because there is continuing nervousness about unrest spreading in the region." Feb 2 USD89.75 ­ Fears that Egyptian crisis could spread to other parts of Middle East The UK manufacturing PMI increased from an upward-revised 58.7 in December to 62 in January, the highest since the series began in 1992 and much stronger than consensus expectations of 58 Russia's Federal State Statistics Service reported that in 2010 Russian GDP growth reached 4% y/y, higher than the consensus forecast; the preliminary estimate does not reveal growth according to various subcomponents or for 4Q10, but monthly data indicate an improvement in fixed investment in 4Q10. Feb 1 USD89.51 ­ Million people march in Cairo. Brent continues to climb ­ although WTI loses ground. Jan 31 USD90.96 ­ It looks like the end for Mubarak ­ but even though army announce that they will not use force against protestors

concerns about Suez Canal security drive market. The U.S. Bureau of Economic Analysis advance

consumption and the narrowing of the trade deficit.

estimate for 4Q10 GDP indicated that the economy grew at an annualized rate of 3.2% q/q after growing 2.6% in 3Q10, with a heavy drag from inventories and a boost from

Brent closes above

USD100Bbl for first time in 2 years.

Jan 28 USD88.15 ­ In efforts to keep up on top of asset bubble inflation The State Council has announced that some cities will be allowed to implement a property tax, which should raise the carrying costs for property speculation, and Shanghai and Chongqing have said they will be part of the program. The State Council also raised the down payment on second home purchases to 60% from 50%. Jan 27 USD84.42 ­ S&P downgrades Japan on debt worries for the first time in nine years to AAciting the government's lack of a coherent strategy to tackle the public debt load. The price spread between frontmonth benchmark US light, sweet crudes and North Brent oil widened to a record USD11.75/bbl Jan 27, prompting speculation the higher priced Brent should replace West Texas Intermediate as the market's usually quoted benchmark.

The IMF has issued its clearest warning to date that the latest US fiscal stimulus is ill-judged, unlikely to do much for growth and raises the

Jan 26 USD86.12 ­ risk of a bond crisis over the medium term. Statement seems at odds with revised upward forecast announced yesterday Obama gives upbeat State of the Union speech focusing on education and new technology, but speech given after US government cited falling home prices and slowing manufacturing growth, indicating economic weakness Olver Jakob commented, Federal Reserve Chairman Ben Bernanke "is probably now the only policy maker not worried about commodity inflation. [Saudi Oil Minister Ali I.] Al-Naimi was not that worried a few months back, but his latest comments about oil prices have been a bit more dovish." The EIA said commercial US crude inventories increased by 4.8MnBbls to 340.6MnBbls in the week ended Jan 21, well beyond the Wall Street consensus for a build of 1.2MnBbls. Jan 25 USD85.05 ­ Anti-government mass protests start up in Egypt.

Shock 0.5% fall in UK 4Q10

­ partly as a result of the weather. Osborne not for turning. Mervyn King says UK standard of living to fall at fastest rate since 1920s as issue of 6 year wage stagnation comes to the fore. Just before the World Economic Forum,

GDP

the IMF revised up its forecasts for global growth on the basis of stronger momentum in the U.S. economy, which it now expects to expand 3% in 2011 before growth

moderates to 2.7% in 2012 as stimulus wears off.

Plan C for UK Fiscal Consolidation, RGE - The UK government has engaged in

a forceful reduction of its fiscal deficit ("Plan A") to ensure debt sustainability and thereby reduce the risk of a loss of market confidence in public finances. The move has been effectively endorsed by Bank of England Governor Mervyn King, who has said that further quantitative easing could be used to support the economy if necessary ("Plan B") In RGE's view, however, the risk to the market was overstated, as the UK has enjoyed safe-haven status while pressures have intensified in eurozone countries. We see no assurance that the rest of the economy will continue to expand while the government tightens its belt, and Plan B might not be enough to offset the recessionary risk, given that the Bank of England's base rate already has been lingering just above zero. Supporters of

immediate fiscal tightening say that there are signs of recovery, led by the private sector, but we expect private consumer demand to be subdued in 2011, and uncertainty over the economic outlook could hold back capital spending. Jan 24 USD86.69 ­ The index of business confidence for German trade and industry surprised analysts again by continuing its upward trend for the 11th consecutive month in January to reach 110.3--its highest level since national reunification. Saudi Arabia's

energy minister indicated the Organization of Petroleum Exporting Countries might increase production. Saudi Oil Minister Ali Al-Naimi was quoted

as saying, "OPEC's policy is to meet any increase in oil demand to maintain the supplydemand balance. Some OPEC countries will increase their production capacities, thus maintaining OPEC's spare capacity at approximately 6 million b/d." Jan 21 USD88.17 ­ While global markets this week have been rattled by concerns that China is overheating, several signs suggest that the country's growth rate may in fact be slowing this month following a robust December, according to China Confidential surveys and grassroots research this week. According to CC, the domestic freight volumes are showing a moderating trend, car sales are slumping and exports from Guangdong, the manufacturing powerhouse, appear to be losing momentum. Though the evidence for a slowdown is not comprehensive, it is sufficient to question the prevalent view that Beijing may be forced to deploy imminent and sharp measures to curb overheating. China confidential also discussed the liquidity shortage. An acute liquidity shortage sent interbank rates surging in China on Friday as banks competed for funds partly to escape potential central bank punishment for a lending surge that appears on track to exceed Rmb 1,000bn in January. We do not think, however, that the surge in bank lending reflects a widespread tendency within the economy toward overheating but rather a desire among banks to get as much lending accomplished ahead of potential policy tightening later this year. Jan 20 USD88.54 ­ China announced 4Q10 growth of 10.3% leading to concerns of over-heating - "China coming back with tightening talk is making the market nervous again," said Nader Naeimi of AMP Capital Investors. "All the fears are back over China going too far and what that will do to growth in the region. It's giving investors the excuse to lock in profits." but stocks bounce back on strong US data. Jan 19 USD90.83 ­ Jan 18 USD91.36 ­

Hu Jintao visits United States

­ cordial but "competitive" atmosphere

IEA

revised up its 2011 demand forecast by 320,000 b/d (2011 89.1Mnbd).

Jan 17 USD91.01 ­ US ex-auto discretionary spending showed some weakness in December, with core retail sales recording a gain of 0.2%, pointing to a cooling in spending after a robust beginning

BP signs joint venture agreement with Rosneft to develop the South Kora Sea, which Russian officials estimates contains 40Mnboe ­ as part of the deal Rosneft secures 5% of BP

to the holiday season in 2010.

Jan 14 USD91.51 ­ Pressure to internationalise/revalue the Renminbi mounts - The People's Bank of China has announced that domestic companies will be allowed to move RMB offshore for foreign investments, providing another channel for the currency to flow out of China China Confidential believe inflation concerns

President of Tunisia steps down after mounting domestic pressure.

stabilizing. Jan 13 USD91.37 ­

Portugal granted temporary relief after successful

Spain and Italy also successful but forced to pay higher interest rates during oversubscribed bond auctions. Italy sold 6Bn of five-year bonds at a rate of 3.67% and 15-year bonds at 5.06%; Spain sold their targeted 3Bn of five-year bonds at a rate of 4.542%. Jan 12 USD91.83 ­ Larger than expected drop in US oil stocks. Trans Alaska pipeline still closed. Jan 11 USD91.09 ­ Trans Alaska pipeline closed for third consecutive day Jan 10 USD89.22 ­ Reported that US created only 103,000 non-farm jobs in December, well below the 150,000 new jobs expected Oliver Jakob noted. "Listening to the chairman of the US Federal Reserve, we had the impression that

bond auction.

bidding up commodity prices has become one of the tools to force the Chinese to revalue the Yuan. That would be a dangerous process when the fear of food price riots is starting to grow," KBC

analysts said the market appears focused on $100/bbl crude

Jan 7 USD88.05 ­ Refinery runs on the East Coast have been trending lower over the last 3 weeks but overall US refinery capacity utilization is increasing and is back to the levels of 2007 as runs in the US Gulf Coast have increased very significantly. Jan 6 USD88.35 ­ Private employment in the U.S. rose by 297,000 in December after a gain of 92,000 in November and 79,000 in October EIA said US crude inventories fell 4.2MnBbls to 335.3MnBbls in the week ended Dec 31. That was more than twice the Wall Street consensus for a 2MnBbls drop; yet crude stocks remain above average for this time of year. Jan 5 USD90.28 ­ Leading indicators and surveys of global manufacturing suggest activity has improved since mid-2010, particularly in China, India, the UK and core Europe, while activity in the eurozone periphery, Russia and Brazil remains near the neutral mark China-US relations warming. A series of bilateral and multilateral meetings in 4Q10 have set the stage for a Washington visit by Chinese President Hu Jintao and a visit to China by U.S. Secretary of Defense Robert Gates--both expected to take place in January 2011.

Jan 4 USD89.37 ­ Chevron suspended operations of the Dibi-Abiteye oil pipeline in Nigeria's Niger Delta in an effort to minimize potential environmental damage while investigating damage caused to the line after militant attacks on oil flow stations. Jan 3 USD91.57 ­ Hungary officially assumed the six-month rotating presidency of the European Union on Jan 1. Estonia becomes 17th Eurozone member on Jan 1. Dec 31 USD91.36 ­ Dec 30 USD89.83 ­ Dec 29 USD91.11 ­ Dec 28 USD91.46 ­ The People's Bank of China has raised interest rates for the second time in 4Q10, in an attempt to stem rising inflation in the face of excess liquidity and strong capital inflows At its December meeting, the Central Bank of Russia kept the refinancing rate at 7.75% but raised the overnight deposit rate by 25 basis points, a first step toward monetary tightening. Dec 27 USD90.97 ­ The Reuters/University of Michigan consumer sentiment index reading for December was 74.5, the highest since June, and the expectations index, which more closely projects the direction of consumer spending, also hit its highest point since June, with a reading of 67.5 In line with Richard Koo's expectation of a very slow recovery, the Japanese government is forecasting 1.5% yoy GDP growth for FY2011 (beginning April 2, 2011), below the rate of 3.1% yoy estimated for FY2010, with private consumption expected to grow 0.6% yoy compared with 1.5% yoy in FY2010.

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

Michael Martins ­ St Croix ­ Fund Manager (doesn't trade food and oil on principle) ­ testified against Commodity Index Funds in front of Congress ­ 0.5% of market but pushing one way (either up or down) ­ used to be S/D, now S/D+Demand 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 Apr 18 ­ OGJ report that analysts at the Centre for Global Energy Studies (CGES), London, said, "Oil prices [generally] are rising to levels that are beginning to affect demand, yet the world is being told once again that markets remain `well-supplied' with crude and that the upward march of prices does `not reflect the realities of supply and demand.'" Members of the Organization of Petroleum Exporting Countries have not replaced oil production lost to the conflict in Libya, leaving a shortage of 1 million b/d last month. "If OPEC will not raise supply to balance the market, demand will have to come down eventually, which will only be achieved by a repeat of the record prices of 2008," CGES analysts predicted. They said, "Despite assertions from energy ministers of both oil-producing and oil-consuming countries, as well as some investment banks, that oil prices have been driven upwards by speculation, the CGES believes that this is not the case. While `speculative' long positions may have set new records, the CGES' index of speculative intensity, which measures the volume of `pure' speculative activity that is not offsetting opposite positions taken by `hedgers', is close to its lowest point since the beginning of 2007." CGES analysts noted, "Oil market fundamentals have been tightening since the middle of 2010. Inventories have been declining since the end of the first quarter in 2010, falling at a rate of more than 1.4 million b/d during the second half of the year. Global stock cover was below 70 days at the start of second quarter in 2011, a level last seen at the same point in 2008 and nearly 5 days below the same time last year." They emphasized, "Oil demand cannot continue to grow over time without the supply to satisfy it. If OPEC will not raise output, then demand growth will eventually have to fall, and that will only be brought about by oil prices rising to

levels high enough to begin destroying demand--exactly as happened in 2008. While the balance of fundamental factors driving oil prices upwards may differ from those in 2008, their net effect may be horribly similar." Apr 6, 2011 - Saudi Arabia's Minister of Petroleum and Mineral Resources Ali I. Al-Naimi and the United Kingdom's Energy and Climate Change Sec. Chris Huhne took aim at speculation in oil markets during a meeting in Riyadh. The official Saudi Press Agency (SPA) reported that cooperation between consuming and exporting countries is important "to stabilize the market, avoid extreme price fluctuations, and decrease the volume of misinformation and exaggerated expectations," all of which harm petroleum markets. "Al-Naimi and myself shared common views that there is no shortage of supply and hence there is no reason behind the soaring oil prices, which hover around $115-120/bbl today," said Huhne following his meeting with Al-Naimi. Huhne said Al-Naimi is "very committed on providing stability to the oil market." He said, "To have a very volatile oil market impacts growth. There is a very strong common interest between Saudi Arabia and consumers." Nov 5 ­ Not everyone feels that the injection of fresh liquidity from QE2 will boost oil prices as the market has already factored in QE2. Walter de Wet at Standard New York Securities Inc., the Standard Bank Group, said, "We believe that the Commodity Futures Trading Commission data released later today is likely to show that noncommercial long positions have increased from already high levels last week." The weekly CFTC report last week showed net speculative length in crude pushed higher last week, while net speculative length in oil products declined. De Wet said, "The current level of the speculative length in oil could cause oil prices to pull back very sharply despite the Fed's QE2 program. To highlight the risk of such a correction, there were two previous big drops in oil prices when net speculative length had reached current levels. One was in January-February, another was April-May. We believe that commodity markets are pricing in QE2 already, and commodities will not necessarily continue to rally. We need new data to support higher prices." Nov 3 - Fed pumps USD600Bn into the US economy in what FT.com describes as an all out bid to shore up economy. It is feared that this could lead to another round of asset speculation encompassing the commodities futures markets. Feb 26 - CFTC member Scott D. O'Malia speaking at a conference in Tokyo noted the importance of spare capacity and its role in determining oil prices. "The price of oil peaked in 2008 at USD147Bbl, in part, because the global demand had virtually eliminated any spare capacity in the global oil markets. In fact, during the price spike, there was less than 2Mnbd of spare capacity". He argued that the problem of limited spare capacity could creep back by 2015 because most future demand is amongst developing countries and these countries (like China) aren't always transparent in reporting oil data. However, he also singled out traders and the shadowy world of oil-in-transit as another factor in masking the true supply/demand picture in the oil market. O'Malia argued, "We must call into question the practices of certain oil traders that buy oil and put that oil into storage, if such practices are designed to extract money from consumers and producers." Jan 22, 2010 ­ Oliver Jakob argues that the CFTC's implementation of a new rule on position limits will have more impact on energy prices in the short term than Obama's bank break up plans. He said, "The CFTC is putting the Street up against the wall with rules on limits that should force some of the largest banks to choose between speculative trading and being a swap provider in commodities, and this will not be dependent on the broad reforms in the banking sector wanted by President Obama. The CFTC proposal covers many potential loopholes and if we thought the proposal was pretty harsh for the business line of some of the large Wall Street commodity banks, after hearing the president yesterday we are more convinced than ever that the CFTC is for real. We will therefore increase our risk factor for liquidation and de-leveraging of positions in commodity indices in the fourth quarter 2010 [or] the first quarter of 2011."

New Crude Oil Production Capacity Coming on Stream

Source: C.R. Weber, Oil & Gas Journal, and other industry publications Mar 17 - ExxonMobil Corp. expects to add nearly 1.4 million boe/d net to its production by 2016, and oil will account for 80% of that new production, company executives recently told analysts in New York. Mar 8 ­ The US EIA in its latest short term energy forecast stated that US crude production, which grew by 150,000 b/d to 5.51 million b/d in 2010, would decline by 110,000 b/d in 2011 and by 130,000 b/d in 2012. It said the 2011 forecast includes declines in Alaska of 60,000 b/d in 2011 and a further 10,000 b/d in 2012 because of maturing fields there. EIA also forecast that production from the US Gulf of Mexico would drop by 240,000 b/d in 2011 and another 200,000 b/d in 2012. The Alaska and gulf production declines will be offset by projected increases in the Lower 48 states of 190,000 b/d in 2011 and 70,000 b/d in 2012, it added. Dec 16 - Saudi Aramco let contracts worth nearly USD500Mn to GE Energy for equipment to expand Shaybah field's oil production and natural gas-processing capacities. The expansion is expected to boost crude oil production capacity to 1Mnbd compared with Shaybah's current capacity of 750,000 b/d. Shaybah, in southeastern Saudi Arabia, has undergone various expansions. An upgrade completed in June 2009 boosted its crude capacity from 500,000 b/d to its current capacity. Dec 15 -- Production from Jubilee oil and gas field off Ghana has started, and partners expect output to reach 55,000 b/d of oil by year end and 120,000 b/d during the first half of 2011 when additional wells are completed. The first tanker of oil from Jubilee field is expected to leave in January 2011. The field in the Gulf of Guinea came on stream 42 months after the 2007 discovery.

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.

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).

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 - Greenland's Bureau of Minerals and Petroleum will license 50,000 sq km off Northeast Greenland in 2012-13. Apr 2 ­ Saudi Arabia's unexpectedly calls for oilfield service firms to expand the kingdom's oil rig count by nearly 30 percent ­which would mean the rig count climbing from 92 to 118. Apr 1 ­ Alaska Gov. Sean Parnell asked US Sec. of the Interior Ken Salazar and the federal government to work with the state of Alaska to accelerate development of Alaska's Outer Continental Shelf resources. Currently, the Bureau of Ocean Energy Management, Regulation, and Enforcement is considering a preferred alternative in the National Environmental Policy Act (NEPA) process for OCS leasing. Parnell asked Salazar to ensure that federal drilling regulators work directly with Alaska Natural Resources Commissioner Dan Sullivan to ensure Alaska's input is considered as the process guiding OCS leasing moves forward. "Instead of financing new foreign sources of oil in the OCS off Brazil, we need to develop and increase our domestic supply of oil and gas," Parnell said in a Mar. 31 letter. He cited a 2008 USGS report and a University of Alaska study detailing the massive reserves held in Alaska, and he outlined safety and spill prevention regulatory requirements in Alaska. Mar 31 ­ The US Bureau of Ocean Energy Management, Regulation, and Enforcement approved a sixth deepwater drilling permit that complies with new safety standards implemented in the wake of the Deepwater Horizon explosion and resulting oil spill. Mar 22 ­ The US Bureau of Ocean Energy Management, Regulation, and Enforcement approved an exploration plan submitted by Shell Offshore Inc. for three exploratory wells about 130 miles off Louisiana. Mar 11 ­ The US Bureau of Ocean Energy Management, Regulation, and Enforcement issued the second deepwater drilling permit under new regulations imposed following the Apr 20, 2010, Macondo well accident and Gulf of Mexico oil spill. BHP Billiton Petroleum received a revised permit to drill Well SB 201 on Green Canyon Block 653 in the deepwater gulf about 120 miles off Louisiana. Mar 10 ­ Repsol E&P USA Inc. plans to invest at least USD768Mn over several years in an exploration joint venture on Alaska's North Slope. Mar 8 ­ BP PLC Chief Executive Robert Dudley told the IHS-CERA energy conference BP is enhancing its standards for blowout preventer testing, cementing, well-integrity testing, rig audits, and other well operations, he said. BP is working with industry groups to determine if spill prevention standards can be enhanced industry-wide. "In 10 years' time, I would expect that there will be a new generation of blowout preventers that represent a major advance on the ones we use today," Dudley said.

Feb 28 ­ The US Bureau of Ocean Energy Management, Regulation, and Enforcement approved the first deepwater drilling permit since the Macondo well accident and crude oil spill. BOEMRE said Noble Energy Inc.'s application for a permit to bypass was for Well No. 2 in Mississippi Canyon Block 519 about 70 miles southeast of Venice, La. Feb 24 - Development of resources in the Chukchi and Beaufort seas off Alaska's Arctic coast would create an average 54,700 jobs/year nationwide with a USD145Bn total payroll and generate USD193Bn in federal, state, and local revenue over 50 years, according to a study by Northern Economics Inc., Alaska's largest private economic consulting firm, and the University of Alaska at Anchorage's Institute of Social and Economic Research. Feb 7 - Shell Alaska dropped its plans to drill in the Beaufort Sea this year. The announcement came after a ruling last month revoked federal clean air permits to allow the drilling. Feb 3 ­ A federal district court judge in New Orleans found the US Department of the Interior in contempt of his order to lift a moratorium on deepwater drilling, which DOI imposed following the Macondo well accident and oil spill last spring. Regulators acted with "determined disregard" by instituting a second ban after Judge Martin L.C. Feldman overturned the Obama administration's first moratorium on June 22, Feldman said in a Feb 2 ruling. Feb 1 ­ CNOOC will join Chesapeake Energy Corp. in a Niobrara-focused exploration and production program in the Denver-Julesburg and Powder River basins. Jan 31 ­ Hess Corp. produced 20,000 boe/d from North Dakota's Bakken oil play as of yearend 2010, and it expects to double production there by yearend 2011.. Jan 31 ­ ExxonMobil Corp. and Russia's OAO Rosneft have reached an agreement concerning joint development of oil and gas resources in the Black Sea, to include an initial focus on oil exploration and production in the Tuapse Trough in the Russian Black Sea basin. Jan 26 - Heritage Oil PLC has discovered as much as 12.3 tcf of gas on the Miran West structure in Iraqi Kurdistan and is evaluating development options under which production could start into European markets as early as 2015 using planned regional infrastructure. Heritage, placing the value to the company at USD2.7Bn, described Miran as the sixth largest gas field discovered in Iraq and the largest gas field to be discovered in the country for more than 30 years. Jan 25 - Long-term Gulf of Mexico deepwater development could be seriously jeopardized if the US Department of the Interior increases the time spent reviewing and approving drilling permit applications, a Wood Mackenzie study commissioned by the American Petroleum Institute concluded. Nearly one third of domestic deepwater production could become uneconomic, resulting in less energy production, less investment, and less revenue to government, it warned. Jan 21 - Forest Oil Corp. announced a 2011 budget of USD600-650Mn which represents a 10% reduction on its 2010 budget. Jan 19 - Wood Mackenzie expects last year's recovery in the UK upstream oil and gas sector to continue through 2011. Returning confidence, the analysts claim, will lead to capital investment rising from £4.4Bn (USD7Bn) in 2010 to £7.7Bn (USD12.3Bn) in 2011. This will leading to a temporary halt in the long-term decline of the UK's oil and gas production. Additionally, the likelihood of a stable, high oil price should lift exploration and appraisal drilling activity on the UK continental shelf. Jan 11 ­ Gulf producers Iran and Saudi Arabia will lead offshore investments in the Middle East region over the next few years, according to Infield Systems. The study also says Azerbaijan should remain the largest offshore producer of both oil and gas in the Caspian Sea, and also leads the way in capex, with Kazakhstan, Russia, and Turkmenistan each expected to contribute USD1.6-2Bn over the forecast period. Infield's new "Offshore Middle East & Caspian Sea Oil & Gas Market Report To 2015" predicts a 33% increase in offshore capex across the Middle East and Caspian over the next five years compared to 2006-10, up from USD29.9Bn to around USD39.9Bn. Much of the growth will come from an expected capex increase of $6 billion in Iranian projects to around USD12Bn. Infield forecasts capex in Saudi Arabia of USD5.8Bn over 2011-2015, up from USD4.5Bn during 2006-2010. Jan 6 ­Total E&P UK and DONG E&P UK Ltd. reported a gas-condensate discovery West of Shetland on the UK Continental Shelf Dec 11 ­ Petrobras has taken exception to earlier claims by BG Group concerning the estimated volumes of recoverable oil equivalent, as well as the capital and production costs of the Tupi and Guara fields in the Santos basin off Brazil. It reiterated the estimates that have already been announced, of 5-8 BnBoe recoverable in Tupi and Iracema (Block BM-S-11), and 1.1-2 BnBoe recoverable in Guara (Block BM-S-9).

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

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. Apr 8 ­ Japan's refinery industry has been hit hard by the Mar 11 earthquake. At one point 6 refineries/1.4Mnbd were out of action. Fortunately, planned shutdowns this year--mostly from China, South Korea, and India--are not as high as in 2009 and 2010. Nevertheless, the Asian product market will tighten in 2011 with cracking margins already increasing. Possible shortages include (1) Shortages of diesel oil in the region as Japan was a net exporter of 190,000bd of diesel in 2010. (2) Increase in low-sulfur fuel oil demand for power generation expected due to outages of nuclear plants. To make up for the loss in Japanese refining capacity in the aftermath of the disaster, some refiners have planned to increase their crude runs. Brazil's Petroleo Brasileiro SA (Petrobras) has reportedly increased production at its 100,000-b/d Nansei Sekiyu Nishihara refinery in Okinawa by 24%. Production at the facility was 46,000 b/d before the earthquake. JX also has reportedly planned to increase operating rates at its Okayama and Oita refineries by 30,000 b/d. Cosmo Oil has also reportedly planned to increase runs at its three other undamaged refineries in Sakai (100,000 b/d), Sakaide (110,000 b/d), and Yokkaichi (125,000 b/d). Meanwhile, the Japanese government has lowered the obligation for industries to hold emergency stocks by 3 days to 67 days, according to the IEA. As a result, around 8MnBbls of products could be released into the market. "Nonetheless, Japan's product imports may still rise as a result of the refining outages, and some damaged refineries may take a while to come back on stream," FACTS said. Depending on the duration of the shutdown at the affected refineries, it is possible that METI will allow refiners to reverse (at least temporarily) some or all of the 285,000 b/d of refining capacity closures that occurred in 2010. A further 160,000 b/d was scheduled to permanently be removed from operable capacity this year at Fuji Oil's Sodegaura and Toa Oil's Keihin plants, but this could potentially be postponed to aid the country during reconstruction. "Overall, barring a meltdown of nuclear plants, we should start to see the market easing back to normalcy over the next few weeks, and as a result, we expect cracking margins to moderate," FACTS said. Apr 6 - Saudi Aramco has completed a 38 day total shutdown of its wholly owned hydroskimming refinery at Yanbu on the Red Sea in an upgrade that increased throughput capacity to 250,000 b/d. One of 30 projects conducted during the shutdown was the upgrade to high-capacity stainless steel in crude-tower trays as part of a total revamp that will improve diesel quality and accommodate the throughput increase. The refinery had been operating at about 225,000 b/d. Mar 31 - Petroplus Holdings AG expects to stop running crude in April at its 84,800-b/d refinery at Reichstett, France, and to convert the facility into a terminal. The company announced plans to close the refinery last year. Mar 28 ­ Essar Energy will defer a 35-day shutdown related to expansion of its 300,000 b/d Vadinar refinery in Gujarat, India, to keep products flowing to Asian markets jolted by unrest in the Middle East and the earthquake and tsunami in Japan. Mar 23 - Aramco Overseas Co. BV and PetroChina Co. Ltd. have signed a memorandum of understanding for joint development of a 200,000-b/d grassroots refinery in Yunnan Province in far southwestern China. The high-conversion refinery would process Arabian crude oil and yield products including ultralow-sulfur gasoline and diesel meeting Chinese specifications. Under a long-term contract, Aramco would supply as much as all the crude needed by the refinery. Mar 22 ­ Russia's Deputy Prime Minister Igor Sechin said that Japan may also join Russia's largest oil producer OAO Rosneft in the construction of a petrochemical facility in the Russian Far East. Mar 21 - Tesoro Corp. will expand crude capacity of its 58,000-b/d refinery at Mandan, ND, to 68,000 b/d to handle oil from the Bakken shale and elsewhere in the Williston basin. The company expects to invest about USD35Mn in the expansion. Mar 16 - Valero Energy Corp. plans to expand the crude unit capacity of its McKee refinery in Sunray, Tex., by 25,000 b/cd to increase total capacity to 195,000 b/cd. Mar 11 ­Valero Energy Corp. has agreed to buy Chevron Corp.'s 220,000-b/d refinery at Pembroke, Wales, for USD730Mn plus a payment for working capital estimated at USD1Bn. Mar 4 ­ US Environmental Protection Agency regulation of refineries' greenhouse gas (GHG) emissions could drive many US refiners out of business by placing them at a significant disadvantage to foreign gasoline, diesel fuel, and jet fuel suppliers, according to National Petrochemical & Refiners Association Pres. Charles T. Drevna Feb 21 ­ Essar Energy offered to purchase Royal Dutch Shell PLC's 272,000 b/d Stanlow refinery and associated local marketing businesses in the UK for USD1.3Bn, with closure expected by mid-2011. Shell signed an agreement to sell to Essar on Mar 29. Feb 1 ­ BP puts its US refineries at Texas City, Tex., and the Carson, Calif., near Los Angeles, up for sale as part of a strategy in which BP plans to reshape its downstream business, slashing its US refining capacity in half. Jan 12 - Brazil's privately held refinery Refinaria de Petroleos de Manguinhos SA signed a memorandum of understanding with Astra Oil Trading NV "to discuss and plan the best use of assets."

Jan 5 ­ GS Caltex, Seoul, plans to add upgrading capacity at its 760,000 b/cd refining complex at Yeosu, South Korea. It will spend USD978.6Mn to add 53,000 b/d of vacuum gas oil fluid catalytic cracking capacity and 24,000 b/d of gasoline hydrodesulfurization capacity. It also will add alkylation capacity of unspecified size. Dec 16 ­ A study by FGE-FACTS Global Energy, Honolulu concluded that while Japanese refiners are heading into a second round of capacity reductions, Refineries for national oil companies (NOCs) in China and India continue to expand capacities as 2010 closes. The study also said up to 5 years will pass before any new major capacity will be commissioned by Asian refiners, securing crude from the Middle East is becoming more important for Asian refiners (as Middle Eastern refineries come on stream and soak up Middle Eastern crude), and conversion capacity is added far more quickly than primary distillation capacity in the Asia Pacific. The

What a Democratic Presidency Means for US Energy Policy ­ A Shift Away from Fossil Fuels

Source: C.R. Weber, Oil & Gas Journal, and other industry publications Discussion of Obama's policy steps on the Road to Copenhagen (December) where world leaders will negotiate a replacement for Kyoto, via Beijing (September) as China and US battle to become the leaders of the new green energy revolution. `So we have a choice to make. We can remain one of the World's leading importers of foreign oil, or we can make the investments that would allow us to become the world's leading exporter of renewable energy...' - US President Barack Obama, March 19, 2009 The Obama administration has embraced a range of new energy investments, such as the six below included in the American Recovery Act. This chart provides a breakdown of USD30Bn which has been earmarked for green projects by the US Government. Investments range as low as USD600Mn for green job training that will prevent the outsourcing of this new developing business sector all the up way to USD11Bn for a smarter US power grid which will help to move the renewable energy around the US. Mar 30 ­ US President Barack Obama set a goal of reducing imports of foreign oil by one-third in a little more than a decade, and said that US production will need to rise significantly as a result. That includes adopting incentives to encourage federal leaseholders to begin producing more quickly from tracts they already hold, he said. "Last year, American oil production reached its highest level since 2003, and for the first time in more than a decade, oil we imported accounted for less than half the liquid fuel we consumed," he said in an address to students at Georgetown University. "To keep reducing that reliance on imports, my administration is encouraging offshore oil exploration and production--as long as it's safe and responsible." Olivier Jakob at Petromatrix, Zug, Switzerland, said, "President Obama announced a plan to reduce US oil imports by a third over 10 years. But why wait 10 years? The US could reduce crude oil imports by 10% by next week and 20% within 2 years if it really wanted to." Feb 24 ­ US House Natural Resources Committee leaders promised to raise questions about what they consider a de facto offshore drilling moratorium with officials at the US Department of the Interior at hearings in the next 2 weeks. Feb 16 ­ The White House followed through on US President Barack Obama's promise to eliminate oil and gas incentives and preferences with a fiscal 2012 federal budget request that would increase direct taxes on the industry by an estimate USD3.472Bn next year and USD43.612Bn over 10 years. Feb 3 ­ A federal district court judge in New Orleans found the US Department of the Interior in contempt of his order to lift a moratorium on deepwater drilling, which DOI imposed following the Macondo well accident and oil spill last spring. Regulators acted with "determined disregard" by instituting a second ban after Judge Martin L.C. Feldman overturned the Obama administration's first moratorium on June 22, Feldman said in a Feb 2 ruling. Jan 26 ­ Obama gives State of the Union speech. According to Raymond James & Associates Inc. the speech failed to lift hopes among energy analysts. "After 2 years of wasted opportunities to create something akin to a real energy policy, more pie-in-the-sky targets (80% clean power by 2035, anyone?) just won't cut it." Oct 12 ­ Secretary of the Interior Ken Salazar has determined it is appropriate that deepwater oil and gas drilling resume, provided that operators certify compliance with all existing rules and requirements, including those that recently went into effect, and demonstrate the availability of adequate blowout containment resources, according to a statement released today.

Oil Industry Rationalisation

Source: C.R. Weber, Oil & Gas Journal, and other industry publications 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 $8 billion deal in a ruling that upheld a challenge by the Alfa-Access-Renova (AAR) consortium, BP's Russian partner in TNK-BP. Mar 23 ­ Energy Transfer Partners LP and Regency Energy Partners LP, both of Dallas, have formed a joint venture to buy LDH Energy Asset Holdings LLC from Louis Dreyfus Highbridge Energy LLC for USD1.925Bn. Mar 23 ­ Anadarko Petroleum Corp. will buy BP America Production Co.'s 93% interest in the Wattenberg processing plant in northeastern Colorado for USD575.5Mn, closing by midyear. Mar 15 - Repsol has agreed to sell 3.83% of YPF in a move that will trim its stake in the Argentine producer, refinermarketer, and chemical manufacturer to 75.9%. Feb 25 ­ BP PLC said it intends to sell several of its interests in the UK, including the Wytch Farm onshore oil field and all of its operated gas fields in the southern North Sea, including the Dimlington terminal and associated pipeline systems. Feb 21 - Reliance Industries Ltd. announced it was selling a 30% stake in 23 oil and natural gas production sharing contracts to BP PLC for USD7.2Bn along with future performance payments of up to USD1.8Bn depending upon development of commercial discoveries. Feb 7 - Ensco PLC agreed to buy Pride International Inc. for USD7.3Bn, marking the biggest consolidation in the offshore drilling industry since Transocean Ltd. announced plans to acquire GlobalSantaFe Corp. in July 2007 Feb 1 ­ BP puts its US refineries at Texas City, Tex., and the Carson, Calif., near Los Angeles, up for sale as part of a strategy in which BP plans to reshape its downstream business, slashing its US refining capacity in half. Jan 26 - Keen interest in shale plays is expected to propel strong upstream merger and acquisition activity this year, said Wood Mackenzie Ltd. analysts. Restructuring among international oil companies and aggressive spending by Asian national oil companies (NOCs) also is expected to drive active M&A levels. WoodMac's report "2010 in Review and the Outlook for 2011" showed USD183Bn was spent on upstream M&A deals last year. US shale gas transactions reached USD39Bn, or 21% of global activity, said the independent research firm of Edinburgh. "The M&A market returned to peak levels in 2010, and the healthy deal activity at the end of the year bodes well for 2011," said Luke Parker, manager of WoodMac's M&A research. Unconventional oil and gas asset deals primarily drove 2010 M&A activity, Parker said. Jan 25 ­ BP's divestment of assets continues. Ecopetrol SA and Talisman Colombia acquired BP Exploration Co. Ltd. for $1.75 billion and renamed the company Equion Energia Ltd. Jan 17 ­ BP signs joint venture agreement with Rosneft to develop the South Kora Sea, which Russian officials estimates contains 40Mnboe ­ as part of the deal Rosneft secures 5% of BP Jan 13 ­ Marathon Oil Corp announced plans to spin off its downstream business. Jan 5 - Worldwide sales of upstream oil and gas properties reached a record USD107Bn in 2010, a 160% increase above 2009 transactions, according to preliminary figures by IHS Inc., Englewood, Colo., for its 2011 review of mergers and acquisitions. This increase was driven by spending by national oil companies; major divestiture programs by BP PLC, ConocoPhillips, Suncor Energy Inc., and Devon Energy Corp.; as well as major joint ventures focused on North American unconventional resource plays, IHS said. Dec 16 - The US Department of Justice and Environmental Protection Agency jointly file suit against BP to recover damages from the Apr 20 Macondo well accident.

Shipping News

Source: C.R. Weber, and other industry publications Two tanker shipping companies launched ipos in March ­ Crude Carriers Corp, Scorpio Tankers 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 Apr 13 - Omega amends debt facility - Omega announced that it has reached an agreement with its lenders to amend the maturity date of both the current senior and junior loan facilities. Apr 8 - Top Ships Announces Waiver From Alpha Bank - TOP Ships has announced that it has obtained a waiver from Alpha Bank until February 28, 2012 in relation to the breach of certain financial covenants under the Alpha Bank credit facility. Apr 8 - Buana Listya Tama Eyes May IPO - BLT subsidiary, Buana Listya Tama, is to sell 7.26Bn shares, which represents 39.8% of the company's capital, in its Indonesian IPO next month. The offering is set to take place between 10 and 12 May Apr 5 - Genmar Founder Buys Company Stock - It is reported that Genmar's founder and chairman, Peter Georgiopoulos, has acquired 859,832 of the company's shares at USD 2 each increasing his holding in the company to 6,503,241 shares. Apr 5 - D/S Torm Eyes Brazilian Market - D/S Torm plans to open a new office in Rio de Janeiro to expand its business in the Brazilian bulker and tanker market and has launched a search to find management to run Torm Brasil Transporte Maritimo. Apr 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 April 29, 2011 to all shareholders of record as at April 15, 2011. Mar 31 - Top Ships Receives Nasdaq Notice - Top Ships received written notification from The Nasdaq Stock Market dated March 28, 2011, indicating that the closing bid price of Top's common stock for the previous 30 consecutive business days was below the minimum USD 1.00 per share bid price. Mar 31 - Genmar Signs Credit Agreement With Oaktree Capital Management - Genmar has signed a credit agreement with an affiliate of Oaktree Capital Management, under which such affiliate will invest USD 200Mn in payment-in-kind toggle floating rate secured notes to be issued by certain subsidiaries of the company. Mar 31 - Genmar Announces Pricing of Common Stock Offering - Genmar has announced that it has commenced an underwritten public offering of 23Mn primary shares of its common stock at a price to the public of USD 2.00 per share. Mar 23 - Frontline Declares Purchase Option, Sells and TCs Back VLCC - Frontline has declared its option to acquire the 2002-built VLCC Front Eagle, currently chartered in from a German KG. The vessel has simultaneously been sold to an unrelated third party for USD 67Mn. Mar 22 - NewLead Announces Participation in Scorpio's Handymax Tanker Pool - NewLead Holdings has announced that two of its product tankers, the Hiona and the Hiotissa, will participate in Scorpio's Handymax Tanker Pool (SHTP), a major tanker pool with more than 30 vessels currently participating. Mar 21 - DHT Suspends Bond Loan - DHT Holdings reports that it has decided to suspend its contemplated unsecured bond loan in the Norwegian bond market which was announced on March 7, 2011 due to the prevailing market conditions.

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