After months of speculation, the attack on Iraq by a U.S.-led coalition finally began yesterday.  Although there are still many uncertainties regarding the impact of the war on shipping, here are some of the initial developments:

·         Iraqi oil exports have ground to a halt, and there are reports that some oil wells in Iraq have been set on fire.  In February, Iraq produced 2.5 mbd of oil, which represented about 3% of global output.

·         However, Saudi Arabia has increased production, and has reportedly built up its stocks on land and at sea as well.  This most likely contributed to the steep drop in oil prices as the war got underway, with the price of Brent crude dropping from $34/bbl to $25/bbl in the past week.  Bunker prices have also fallen sharply.

·         War-risk insurance premiums have been implemented, at rates ranging from 0.5% to 1% of hull values.  These costs are generally paid by the charterer of the ship.

The drop in oil prices is perhaps the most surprising result of the attack so far, and its effect on all shipping markets could be significant if it leads to an acceleration in global economic growth during the remainder of 2003.  In the meantime, the tanker market is more directly affected by war-related developments than are the dry bulk and containership markets, although lower bunker costs are obviously beneficial to all markets.

One key development we are watching closely is floating storage.  In just the past few days, we have seen reports that at least seven tankers have been chartered by Jordanian interests for floating storage purposes.  Earlier reports also pointed to a large volume of Saudi shipments, some of which may have had floating storage options.  While the large volume of fixtures has certainly helped VLCC spot rates to approach $100,000 per day, the impact on the tanker market will be longer-lasting if many of these ships are in fact used for storage purposes over the next couple of months.  Otherwise, the ships will be back in the market looking for cargoes within this time frame.

While VLCCs have gotten an immediate boost from these war-related factors, Suezmax demand may decline in the near-term, primarily due to the stoppage of Iraqi shipments through the Turkish port of Ceyhan.

Looking ahead, we expect tanker rates to remain high for as long as hostilities last, based on our assumption that Saudi Arabia will increase production from its February level of 8.9 mbd to its maximum capacity, which is currently estimated at nearly 10 mbd.  With other OPEC countries also likely to produce near their full capacity, total OPEC output should remain near 26.5 mbd during the war, even with Iraqi output at zero for the near future.  This would be down only slightly relative to February’s output level.  We also expect about 4 million dwt of tankers to be employed for floating storage purposes over the next couple of months, providing further support for tanker rates.

These developments are similar to those we outlined in our February main case scenario.  However, so far, OPEC production has been maintained at a higher level than we expected, mainly due to a more rapid increase in Saudi output, along with a somewhat faster return of Venezuelan production.  This has helped propel tanker rates to levels well above what we were expecting.

Nevertheless, we still believe there are significant downside risks in the tanker market, some due to the possibility that oil supplies will be disrupted further, and some due to the rapid fleet growth that is taking place behind the scenes.  Thus, we still expect tanker rates to decline during the second half of this year.

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