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January 2012 Newsletter

Good Day. New Year's greetings to all and best wishes for a healthier economic environment in 2012! As we enter the New Year the spotlight is on sulfur, fuel cost, and quality. As of January 1 global limits on sulfur were reduced to 3.5% and on August 1st the North America ECA zone becomes active with a 1.0% limit. Fuel costs since 1st quarter of 2011 have pretty much remained above $640 a ton for RMG 380. However a number of refineries are expected to cut production as they shut down for upgrades. The expected shutdowns and anticipated growth in world economies should provide the catalyst to further raise the price of fuel and potentially increase supply and quality issues.

SULFUR

We took a look at all RMG 380 samples (No low sulfur 380) for the 4th quarter 2011. Approximately 7% of the samples tested above the 3.5 % sulfur content. Of the 7 % over the 3.5% limit the below pie graph provides a breakout of where the 7% sourced.

The biggest area of concern is the Middle East. More than half of the over 3.5 % samples came from the Middle East. Further of the total amount of samples received in the 4th quarter from the Middle East 48.8% were above the 3.5% new global limit for 2012. For higher viscosity fuels the percentages are more than double that of 380. In the 4th quarter 2011 approximately 19% of submitted samples of 500 viscosity or more had sulfur tested above 3.5%.

CATFINES

We have reviewed the major bunker ports over a 3 year period as well as 4th quarter 2011. As illustrated in the chart below, the percentage of samples that fall under a 20 mg/kg reading continues to decline in almost all areas. With most engines manufacturers recommending a reading of 15 or less, the percentage increases should serve to remind all to ensure that their fuel systems are working properly with 15 mg/kg or less of Al/Si entering the combustion chambers.

Submitted Samples Cat Fines 2009 - 2011

Fuel Prices

Since the 1st quarter of 2011 RMG 380 has traded between $640 and $660 MT. We are forecasting a slow climb in bunker pricing as suppliers try and source suitable cutter stock to deal with the new sulfur regulations and supply of residual oil is cut back when refineries begin upgrade programs. We expect RMG 380 to rise to $675 by late second/early third quarter 2012 and 380 LS to top $700.

HISTORICAL PRICING HOUSTON RMG 380 VS WTI VS BRENT

About Oiltest

Celebrating over 30 years of service, statistical contributors to the IMO, and members of the ASTM Round Robin, our Submitted Sample Program and Dedicated Marine Fuels Laboratory has been recognized as one of the best in the world. Simple, fast, and reliable. With global and regional sulfur standards in focus now more than ever accurate fuel quality enables the reduction of legal operational risks.

Surveys
Oiltest can monitor your bunker deliveries by safeguarding the quantity and quality of bunker fuels delivered to your vessels. Our impartial surveys are internationally recognized, cost effective, and developed basis specific customer requirements.

Additional Services
Oiltest provides advanced diagnostics for marine fuels specializing in identifying contaminants that ISO 8217 tests do not recognize as well as fuel alerts, monthly newsletters, and claims assistance.
Oiltest can also provide your technical team with Marine Fuels Training Courses to heighten awareness of regulation and problem areas.

Please feel free to contact me on any questions or comments.

Best Regards

Rob Leventhal
V.P. Sales and Marketing

October 2011 Newsletter

Good Day to all. We are pleased to present our latest review of bunker trends. This report looks at RMG 380 and RMG 380 LS for the period running January - June 2011, comparing these averages to the period running July - Sep 2011. The 1st tab of the spreadsheet attached (Jan - June RMG380 shows the January - June averages for the major ports in the world. Below that are the RMG 380 LS averages. Given the total number of LS samples to draw from we looked only at worldwide vs. individual ports to ensure statistical relevance. The 2nd tab of the worksheet shows the actual variances for each test in the comparative periods.

In examining the statistics, overall we find:

• The fuels meet specification, but that doesn't mean that it will be trouble free.
• Viscosity shows a small increase, requiring additional heating to obtain the desired injection temperature.
• CCAI shows an increase, indicating that the overall burning quality is not improving.

While at present no global trend is readily identified, (in part due to the fact that localized fuel blending is now standard practice by most suppliers), we can offer some regional precautions. Since a supplier is driven not only by specification and local regulations, but profit as well, local fuel blending components can have a significant impact on a fuel's usefulness.

For example, when a supplier purchases a base fuel with a higher or lower viscosity than required, they will need to blend to meet the specification. A cost effective blend-stock may be high in sediment, sulfur, or metals. The percentage selection of this blend-stock can yield a trouble free fuel, or a problematic one. If a supplier concentrates on too few parameters when making their blend, such as only density and viscosity, some of the other parameters may rise dangerously close to or even exceed their specification limits. One of the issues here may be elevated asphaltenes, which may increase combustion problems.

With blending on the increase, and the price of bunker fuel remaining high, vessel owners will need to pay close attention to a fuel's actual quality in use, not simply that the fuel met the purchase specification.

We are once again seeing increases in fuel problems from fuels that appear to meet the specification, such as excessive sludge and filter clogging problems. In-depth laboratory investigations have frequently discovered polymer contamination as the cause of these problems.

Another recent problem reported was that of sticking fuel pumps, which may lead to engine damage through continued use of the fuel. These types of problems were found to be related to acid contamination.

Finally as we have been pointing out in previous newsletters there continues to be a widening of the spread between the price of a barrel of West Texas Intermediate vs. the price of a MT of RMG 380 in Houston. As of October we have now broken the all- time spread with a whopping 8 x the price of WTI. The reason for this alarming spread is current demand combined with reduced availability of residual fuel. As refineries in the Western Hemisphere shutdown (2 older residual refineries closed this week in The Northeast US). Modern refineries do not produce as much residual as older refineries. Should you have any questions or comments please feel free to reach out to me at rleventhal@oiltest.com

Best Regards
Rob Leventhal
VP Sales

August 2011 Newsletter / North America ECA Zone

On March 26, 2010 a new ECA Zone, (see below), was formally adopted by the IMO for Canada and the United States. As of August 1, 2011, all vessels operating within this 200 mile zone are required to burn Low Sulfur Fuel Oil, (LSFO). Although active enforcement commences on August 1, 2012, according to a US Coast Guard presentation made at Maritime Weeks America in April 2011, the US Coast Guard will begin boarding vessels in 2011 to assist in educating vessel crews on the changes.

Recent reports have indicated that propulsion failure during fuel switchover is on the rise again. Given the much larger scope of the North American ECA, combined with increasingly younger vessel crews, leads us to expect a potentially larger increase in these problems when switching from HFO to Distillate. We have attached a presentation by the USCG covering switchover and legal aspects of the North American ECA.

The question remains: will there be a readily available supply of LS HFO at major North American ports? Many of the refineries in North America are older and use technology that is not able to offer a cost effective desulfurization process for HFO. A review of Fuel sample Sulfur results support this. We looked at submitted samples starting in January 2011 through June 2011 for North American ports, focusing on RMG 380 for average sulfur content.

Here are the results:

Further we have provided the average laboratory test results for RMG 380 for the same time period.

Given that the LS requirement was only recently mandated, there had been very little demand for this product, with few samples of originating in North America, Mexico, or Central and South America with a sulfur level at or under 1.0%. Almost all of the RMG 380 LS samples analyzed were supplied from Rotterdam, Antwerp and St. Petersburg. Given this geographic supply issue, we can expect most vessels, upon entering the new North America ECA, may choose, (need?), to switch over to distillate. This places an increased emphasis on the importance of having both crew and equipment ready to handle the switchover.

Naturally, these regulations will result in higher operating costs for those vessels calling on North American ports. As example, a vessel traveling at approximately 18 knots will need to burn a LS fuel for approximately 10 hours each way or 20 hours in/out of the ECA. The approximate premium for LS 380 is about $75 ton, but may even be higher, as when the product is imported. Therefore, a vessel burning 100 tons per day would experience increased costs of $7,500 if the switchover was to a LS 380, and closer to $30,000, if they choose to burn distillate. For those vessels trading heavily in ECA areas, scrubber technology may also need to be looked at carefully, as it may make better economic sense than burning a LS product.

Earlier editions of our newsletter had tracked the spread of a metric ton of RMG 380 in Houston in relation to a barrel of WTI. Indications were that we would continue to see an enlarging spread between these 2 price factors. Unfortunately this trend has come to fruition.

The highest spread in the last 5 years was on October 2008, with WTI @ $76.75 and RMG 380 in Houston @ $576. This yields a 7.5 to 1 ratio. As of August 1, 2011, the ratio stood at 7.1, which is the highest level since October 2008. At November 2008, just after the global economic crash, the ratio almost collapsed in half to a 4.9 ratio. On August 4, 201, the ratio surpassed the October 2008 record with a 7.6. The next few weeks will be a critical time, as the world economy determines whether we are heading for a double dip recession, and a radical fall off in prices, or just a short pause in global recovery.

Over the next few weeks we will continue to review our submitted sample averages by test for Jan-July 2011, and then begin to compare them to July-December 2011, and work to determine emerging trends. As this study progresses, it will be forwarded to all recipients.

Fuel prices and fuel quality in the Americas will become a major focus with the newly implemented ECA. With complete quantity survey coverage of all major ports in the Americas, including ISO approved laboratories in Panama, Valparaiso, Guatemala, Houston, and NY/NJ, our highly experienced staff will be there to assist on any quantity or quality issues. Should you have any questions or comments please feel free to contact me.

Best Regards

Rob Leventhal
V.P. Sales and Marketing

June 2011 Newsletter / Maritime Week Americas

Good day to all. I recently attended Maritime Week Americas in Cartagena. The main focus of the presentations were an examination of the current situation in the marketplace, what can we expect as new tighter regulations move closer to enactment, and what lies ahead from a macro economic standpoint. All these dynamics will continue to determine future prices and quality for bunker.

Let us first look at the current state of the deep sea fleet. With the now widely adapted practice of slow steaming we have seen a rapid expansion of the active fleet since the recession. According to Lloyd's 2011 statistics the deep sea fleet is as follows:

	Deployed	Ordered	Ordered as %
Containerships	5053	490	9.70%
Bulkers	8863	2613	29.50%
Tankers	12,836	1062	8.20%
Totals	26752	4165	15.60%

A large order book in these 3 segments, similar growth in other segments (cruise industry), and idled fleets back in service will further pressure fuel prices higher. Tight supply and high prices are key elements to the potential for both quantity and quality issues.

Other dynamics are also playing a role on the maritime side:
• Shipping rates are now falling
• Regulations raising fuel costs
• Bank loans more difficult to obtain
• Interest rates are rising
• China spending on shipyards and with low building costs may continue to build. Over 40% of all new builds were produced in Chinese yards in 2010
• Lower fleet values make refinancing very difficult yet if fleet values improve banks may try to increase foreclosures.
• KG (German Investment) spending way down
• Ship values are currently flat

One of the by-products of all of these issues is and will continue to be tighter credit lines with fuel suppliers. As shipping rates fall in many key sectors and fuel prices remain very high (and most likely heading higher) suppliers will be placing more scrutiny on payment terms and sizes of credit lines.

Of course the biggest factor is the world economy, which will have the largest impact of all. While global commodities have seen broad support, higher interest rates and slower growth from emerging countries are a down side risk. Other wild cards are the US housing industry, European Debt, and China. We are also seeing a fundamental shift in growth. The latest GDP forecasted by Wells Fargo in the below chart, illustrates the change in growth away from OECD countries. With growth comes potential inflation, and the developing countries will need to keep a close eye on CPI as increases will hurt consumer spending.

Regardless of the downside risks, the current and projected rates of growth of the Non OECD countries combined with continued consumption (still growth) in the OECD countries has the strong potential in creating a fuel supply issue. This, even before the upcoming tightening of sulfur limits.

On the supply side, the amount of spare capacity by OPEC is rapidly diminishing. According to data presented by FC Stone, spare capacity, which was approximately 6 mmb/d in 2010, will be at a deficit by 2013. We can also see this in the stockpile figures for OPEC. While averages had been about a 62 day supply current levels are around 56 days and typically supply draw down is highest in 4th quarter. Expect that by the 4th quarter this stock will be around 50 days. As supply comes down pricing will go up. If we look at the past and future trend projections for consumption we can see why there are even bigger concerns on supply.

In essence, global demand is expected to rise by about 50% between 2010 and 2020. As discussed in earlier newsletters we now also face the added impact of environmental regulation. In January 2012 the worldwide limits on sulfur change from 4.5% to 3.5% This followed by the full enforcement of the North America ECA Zone in August 2012 requiring 1.0% with 200 miles of coast. The demand for ULSD and other lower sulfur fuels will continue to rise.

Yet to produce low sulfur HFO economically many refineries require sweet crude. Sweet crude comprises only 25% of world crude supplies. So there is a fundamental supply issue in producing the product. Additionally, given that marine fuels represents a very small % of a refinery revenue pie there is little interest investing in the technology to produce low sulfur HFO.

So in order to meet the upcoming restrictions we will see increased demand for distillate as vessels will burn it within ECA zones and suppliers will use it for cutter for HFO to bring sulfur within the 3.5% global limit. All while competing for supply on the land side with global growth.

In looking at our trend lines on sulfur content for HFO bunkered in the Americas we see the following averages. From Jan - May 2011 for US and Canadian Ports our submitted samples for HFO averaged around 2.5% sulfur with the U.S. gulf region on the higher end around 2.9% and East Coast around 2.0%. Similar situation in South America with Venezuela on the higher end of the averages. Thus much work will need to be done to have adequate supply of lower sulfur HFO for voyages to ECA zones or alternatively higher stocks of distillate. As we proceed through the year we will be keeping a close eye on the trends/averages and publish in upcoming newsletters.

As the conference was a focus on the Americas we would be remiss in not discussing the biggest development in the maritime community in the Americas, the widening of the Panama Canal. The progress on the Canal is right on schedule with the opening expected for August 2014. In anticipation of the expected rapid increase in traffic the supply community and government are reacting in a positive manner by expanding the amount of dedicated marine fuel tank storage. Here are the current projects:

Source: Maritime Logistics Services Panama

Administrator	Location	Capacity in M bbls
		2010	2012
AMP	BALBOA	1.76	1.76
AMP	CRISTOBAL	1.59	1.59
APSA	GATUN	1.21	1.21
PATSA	BALBOA	0.98	0.98
Decal	TABOGUILLA	1.05	1.05
Telfers	Cristobal		1.2
Petroport	Cristobal	0.6	2
MOTI	Melones		2.1
TITSA	Taboguilla		2
COASA/Oil Tanking			0.75
	TOTAL CAPACITY	7.19

These projects will increase storage capacity in 2 years by about 47%. No doubt that Panama will become a larger player in the bunker market. With this growth, new supply chains will need to be established from all over the world.

Given all the issues presented, fuel prices and fuel quality in the Americas are set to become an even bigger concern to all parties. With complete coverage of all major ports in the Americas (please see below chart) including ISO approved laboratories in Panama, Valparaiso, Guatemala, Houston, and NY/NJ our highly experienced staff will be there to assist on any quantity or quality issues.

In closing we are pleased to provide our updated historical pricing matrix calculating the spread of a barrel of West Texas crude vs. a ton of RMG 380 in Houston. Since June 1st the spread has widened further and as of June 7th we see WTC @ $99.99 and RMG 380 @ $664 or a 6.7 factor, the highest level since the peak in October 2008. Given all the prevailing conditions covered in this newsletter we can only unfortunately project record prices in the 4th quarter 2011.

Since June 1st the spread has widened further and as of June 7th day we see WTC @ $99.99 and RMG 380 at $664.00 or a 6.7 factor the highest level since the peak in October 2008. Given all the prevailing conditions covered in this newsletter we can only unfortunately project record prices in the 4th quarter of 2011.

Should you have any questions or comments please feel free to contact me.

Best Regards

Rob Leventhal
V.P. Sales and Marketing