Summer Doldrums?

This is a very complex question to answer as one has to take into account domestic gasoline supply structure as well as the refinery utilization and demand for other petroleum products. Even in short and simplified terms, the answer must include refinery utilization, imports/exports of gasoline and other products (especially diesel oil), gasoline arbitrage, and more. As US domestic demand for gasoline has declined (down 1.1% ytd, but down 2.1% yoy basis June), we have observed that imports of gasoline and blending components have declined approximately 93 kb/d, or 7.9%, year-to-date. In addition, domestic output is down 130 kb/d and exports were up by about 41 kb/d. Combined with stock changes, we estimate a decline in domestic demand of about 250 kb/d during the first 6m compared to the same period last year.

1H08 refinery throughput is almost unchanged compared to 1H07. In addition, diesel oil exports have doubled - from 201 kb/d in 2007 to 412 kb/d in 2008! So, despite the decline in driving and in gasoline demand, the product tanker trade to US ports has actually increased. But, more importantly, there has been a shift towards increased exports creating an imbalance in trade flows.

During the first five months of 2008 US driving decreased by almost 30 billion miles. In addition to the reduced distance, the US vehicle market is undergoing a change. Due to the high gasoline prices focus has changed dramatically from SUVs and pickups with large engines to smaller, fuel efficient cars. The Big 3 in Detroit are struggling with lower sales, reduced prices, increased costs - generally the US car buyer is not really interested in their models these days. It is expected that US vehicle sales will drop by about 1.5 million units this year. Broken down in "cars" and "trucks" the former group is expected to decline by about 100,000 units whereas the latter is expected to go down by 1.4 million units. On top of this, manufacturers are struggling in delivering "trucks" as a majority of buyers are seeking four-piston engines, rather than six- or eight-piston engines, and these smaller engines are short in supply.

Hence, we have a situation whereby mileage is reduced and fuel-efficient vehicles are in demand. This must be considered a "double-whammy" that could accelerate declines in gasoline demand.

The chart below shows the seasonality in US driving and deliveries of gasoline. There is a striking regularity, and based on this pattern and assuming a continued decline, we have estimated mileage and gasoline consumption for the remainder of 2008; the result in a 3.5 % decline in mileage and a 2.5 % decline in gasoline demand year-on-year. This will impact tanker trades and we expect continued declines in imports of both blending components and finished gasoline. At the same time, we expect to see continued high exports of diesel oil - we could even see increases as the share of diesel driven vehicles in Europe continues to increase. As there are limits (at least in the short term) to how much the product slate of each barrel of crude oil can be changed, we must expect a gasoline surplus building in the US as long as refiners find it profitable to produce and export diesel oil. As a result, we expect to see gasoline exports increase and also an increased imbalance in trade flows, especially within the Atlantic Basin. In 2007 the average new US car was doing about 27.5 mpg (miles per gallon) compared to about 46 mpg in Japan and 43 mpg in Europe. Industry sources indicate that today it is hard to sell cars doing less than 30 mpg in the US. Does this mean that the US consumer has abandoned "gas-guzzlers"? We doubt it and the last time gasoline prices rose to (by US standards) astronomical heights we saw the same pattern; but as soon as the economy improved and Americans got used to new price levels, they started buying larger cars with powerful engines.

We believe the impact on the tanker market will be less than recent news headlines seem to indicate. On the other hand, we are of the opinion that the current trend will create a more dynamic and volatile tanker market than we have seen.