General:

The Company is one of the largest independent bulk shipping companies in the world. The Company's operating fleet as of September 30, 2009 consisted of 102 vessels aggregating 10.2 million dwt and 864,800 cbm, including 46 vessels that have been chartered-in under operating leases. In addition to its operating fleet of 102 vessels, charters-in for ten vessels are scheduled to commence upon delivery of the vessels between 2009 and 2011 and 16 newbuilds are scheduled for delivery between 2009 and 2011, bringing the total operating and newbuild fleet to 128 vessels.

Recent Developments:

On November 5, 2009, OSG initiated a tender offer for all of the outstanding publicly held common units of OSG America L.P., a Delaware limited partnership formed by the Company, for $10.25 in cash per unit. As of September 30, 2009, the Company effectively owns 77.1% of OSG America L.P. The tender offer will be conditioned upon, among other things, more than 4,003,166 common units being tendered such that OSG would thereupon own at least 80% of the outstanding common units of OSG America L.P. Following the completion of the tender offer, OSG expects to acquire any remaining units not tendered through the exercise of a repurchase right contained in OSG America's partnership agreement. OSG currently owns 8,000,435 units of the 15,000,000 total common units outstanding. The Company will fund the purchase of the outstanding common units from available cash or borrowings under existing credit facilities.

Operations:

The Company's revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by the Company and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products from which the Company earns a substantial majority of its revenues are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported, and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy and level of OPEC's exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally because of scrappings or conversions. The Company's revenues are also affected by the mix of charters between spot (Voyage Charter) and long-term (Time Charter). Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, the Company manages its vessels based on TCE revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.

Operations (continued)

Overview

Daily rates for all tanker segments were weak during the third quarter of 2009, at times trading at or below cash breakeven levels. World oil demand in the third quarter of 2009 was 1.6% below the third quarter of 2008, the fifth consecutive quarterly decline. Slackening oil demand resulted in a reduction in refinery utilization levels that reduced crude oil requirements. As a result, OPEC production levels and tonne-mile demand fell below third quarter 2008 levels. Concurrent with reduced oil and tonne-mile demand, an increase in tonnage entering the market exacerbated the decline in tanker utilization rates, placing additional pressure on freight rates. Demand in China, however, continued to grow as new refineries came online and inventories were built, boosting seaborne imports to record high levels in the third quarter of 2009.

World oil demand during the third quarter of 2009 was approximately 84.6 million b/d, a decline of 1.3 million b/d, or 1.6%, compared with the third quarter of 2008. A decline in demand of approximately 4.2%, or 1.95 million b/d, in OECD countries was partially offset by demand growth in non-OECD countries of 1.6%, or 600,000 b/d. Non-OECD countries and regions such as China, India and the Middle East continued to be the main drivers of growth in world oil consumption. The demand increase in China of approximately 500,000 b/d was due in part to a stimulus package enacted by the Chinese Government earlier this year while demand growth in India was largely driven by increased consumer demand for products. Demand declined in OECD North America, Europe and the Pacific by 3.2%, 5.8% and 3.9%, respectively, primarily due to reduced middle distillate and fuel oil requirements.

World oil demand in the first nine months of 2009 decreased by approximately 2.2 million b/d, or 2.5%, compared with the same 2008 period. Demand in non-OECD countries rose by approximately 280,000 b/d, or 0.7%, led by increases of 4.8% in India and 3.8% in China that were somewhat offset by a 6.5% decline in the Former Soviet Union ("FSU"). OECD demand declined by 5.1% led by a fall of 6.7% in OECD Pacific, primarily Japan, while demand in OECD North America and Europe declined by approximately 4.9% and 4.7%, respectively.

The financial crisis and resultant economic recession that began in 2008 precipitated a steep decline in crude prices from the highs that were reached in July 2008. In response to this decline, OPEC introduced new production quotas that were intended to reduce output by 4.2 million b/d from September 2008 levels. This resulted in reduced OPEC production during both the third quarter and first nine months of 2009 compared with the respective 2008 levels. Weaker oil demand in OECD countries and reduced OPEC production levels, primarily in the Middle East, generated fewer long-haul crude movements to both Western and Eastern destinations and led to a reduction in trans-Atlantic and Far East product movements. As a consequence both crude and product tanker rates in the third quarter and first nine months of 2009 were significantly below comparable 2008 levels.

Third quarter 2009 OPEC production decreased by approximately 2.7 million b/d compared with the third quarter of 2008 and represented a 68% overall compliance level with production quotas. A drop in production of 1.8 million b/d in the Middle East accounted for most of the OPEC decline and adversely impacted long-haul tanker demand. Production declines in North Africa, Nigeria (primarily from continued civil unrest) and South America also contributed to a reduction in tanker demand.

Operations (continued)

Production in OPEC countries declined by approximately 9%, or 2.9 million b/d, during the first nine months of 2009 compared with the same period in 2008 as quota compliance levels reached 71%. Production was down in all OPEC areas, adversely impacting demand in all crude oil tanker sectors.

With on-shore oil inventory levels in OECD areas at or near storage capacity, tankers continued to be used to store oil in the third quarter of 2009. The current oil price contango continues to make it profitable to hold cargoes, especially middle distillates, in floating storage. During 2009, as many as 100 tankers have been used for floating storage, with the majority now holding middle distillates as opposed to crude oil, which was the predominant cargo earlier in the year. This has provided some support to both crude tanker and product carrier rates during both the third quarter and first nine months of 2009.

Exacerbating the weak demand situation, tanker tonnage increased approximately 8% over the first nine months of 2009. This is in sharp contrast to the situation that occurred during the same timeframe in 2008 when there was almost no growth in tanker supply.

After having reached their highest levels in 2008, crude oil tanker newbuilding prices have declined during the first nine months of 2009. VLCC newbuilding prices, which reached approximately $160 million in 2008, are believed to have declined by about 30% thus far in 2009. Prices for modern second-hand vessels in 2009 have also declined from 2008 levels.

The tables below show the daily TCE rates that prevailed in markets in which the Company's vessels operated for the periods indicated. It is important to note that the spot market is quoted in Worldscale rates. The conversion of Worldscale rates to the following TCE rates required the Company to make certain assumptions as to brokerage commissions, port time, port costs, speed and fuel consumption, all of which will vary in actual usage. In each case, the rates may differ from the actual TCE rates achieved by the Company in the period indicated because of the timing and length of voyages, waiting time and the portion of revenue generated from long-term charters. For example, TCE rates for VLCCs are reflected in the earnings of the Company approximately one month after such rates are reflected in the tables below, calculated on the basis of fixture dates.

International Flag VLCCs

                         Spot Market TCE Rates
                       VLCCs in the Arabian Gulf*
            Three Months Ended           Nine Months Ended
               September 30,                September 30,
             2009          2008          2009          2008
Average   $    7,200     $  77,600     $  20,300     $  89,800
High      $   40,500     $ 196,200     $  80,700     $ 250,000
Low       $   (5,800 )   $   7,200     $  (5,800 )   $   7,200

* Based on 60% Arabian Gulf to Eastern destinations and 40% Arabian Gulf to Western destinations

Operations (continued)

Rates for VLCCs trading out of the Arabian Gulf in the third quarter and first nine months of 2009 averaged $7,200 per day and just over $20,000 per day, respectively, significantly lower than rates realized in the same periods during 2008.

The main factor behind the lower rates, both in the third quarter and in the first nine months of 2009 was the significant decline in Middle East production that reduced requirements for VLCC tonnage. Tankers operated at negative TCE rates for a time during the third quarter due to reduced availability of cargoes and high bunker costs, with some owners repositioning tankers for cargoes at other locations.

Arabian Gulf OPEC crude oil production in the third quarter of 2009 was 19.8 million b/d, approximately 2.0 million b/d below levels in the same quarter of last year, but about 200,000 b/d above second quarter 2009 levels. Volumes of Middle East oil moving to both Eastern and Western destinations were down relative to the third quarter of 2008, especially to OECD countries where oil demand was particularly weak and refinery runs were significantly lower. Middle East crude oil production in the first nine months of 2009 was also approximately 2.0 million b/d lower than in the first nine months of 2008. Lower oil demand has hurt worldwide refining margins and caused refiners to reduce their refinery runs. Refinery utilization rates in Europe declined from the mid-80% range in 2008 to just below 80% in 2009 while utilization in Japan dropped from approximately 80% in 2008 to 70% in 2009. Declining oil demand and refinery utilization rates has had a negative effect on long-haul crude oil requirements to both of these areas.

Refinery utilization rates in the U.S. during the third quarter of 2009 were 85.5% compared with 83.5% in the third quarter of 2008. Refinery runs in the third quarter of 2008 were adversely impacted by Hurricanes Gustav and Ike that closed down both offshore production platforms and refineries in the Gulf of Mexico in September 2008. The hurricanes necessitated increased movements of both crude oil and products to the U.S. that benefited freight rates during that period.

Seaborne crude oil imports into China increased during both the third quarter and the first nine months of 2009 compared with the respective 2008 periods. An increase in oil demand and the start-up of new refining capacity resulted in seaborne imports increasing by 17% and 11%, respectively, in the third quarter and first nine months of 2009. Production sourced from West Africa accounted for the increase in the third quarter of 2009 while production in the Middle East accounted for most of the increase in seaborne deliveries during the first nine months of 2009.

The use of VLCCs as floating storage has increased in 2009. Approximately 35 VLCCs are now being used for storage purposes, of which about 70% are being used to store crude oil and 30% to store products.

There was a net increase in VLCC tonnage during the first nine months of 2009 with 44 deliveries being offset by 14 deletions. This was in contrast to the first nine months of 2008 when conversions and deletions exceeded fleet additions. The world VLCC fleet, both trading and for other uses, totaled 534 vessels (159.7 million dwt) at September 30, 2009. The VLCC orderbook totaled 204 vessels (63.3 million dwt) at September 30, 2009, equivalent to 40% of the existing VLCC fleet, based on deadweight tons. As of September 30, 2009, single-hull tankers comprised 17% of the existing VLCC fleet, based on deadweight tons.

                                                                       Form 10-Q

               OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

Operations (continued)

International Flag Suezmaxes

                         Spot Market TCE Rates
                       Suezmaxes in the Atlantic*
            Three Months Ended           Nine Months Ended
               September 30,                September 30,
             2009          2008          2009          2008
Average   $    9,500     $  64,000     $  21,500     $  62,000
High      $   19,000     $ 140,000     $  49,200     $ 140,000
Low       $    2,000     $  18,400     $   2,000     $  18,400

* Based on West Africa to U.S. Gulf Coast

Similar to the VLCC market, third quarter 2009 and year-to-date rates for Suezmax tankers were significantly lower than the comparable periods in 2008.

Nigerian crude oil production during the first nine months of 2009 declined by approximately 180,000 b/d relative to the same timeframe in 2008 as attacks on onshore oil infrastructure resulted in companies shutting in production and declaring force majeure. Nigerian production in July 2009 was approximately 1.68 million b/d (the lowest level in the past 20 years) resulting in a decrease of more than 200,000 b/d in the third quarter of 2009 compared with the third quarter of 2008. Oil production in OPEC North African countries also declined by approximately 250,000 b/d during the first nine months of 2009 compared with the same 2008 timeframe. There was strong demand for this crude during 2008 in Asian countries. North African crude is used to manufacture diesel oil for which there has been growing demand in recent years. Requirements for light sweet crude from North Africa have, however, declined this year in response to weaker demand for middle distillates.

Crude oil exports from West Africa to the U.S. East Coast during the first nine months of 2009 were down more than 25% compared with the same timeframe in 2008. This was primarily due to a 12% decrease in East Coast refinery utilization levels that reduced light sweet crude oil requirements (West African crudes) and thus adversely impacted Suezmax tanker utilization rates. This was partially offset by an increase in crude oil imports into the U.S. from Brazil where production has been steadily increasing.

Growth in the Suezmax fleet, which was minimal during the first nine months of 2008, increased by over 7% during the first nine months of 2009. The increase in tonnage combined with a reduction in tonne-mile demand had an adverse impact on 2009 rates.

The world Suezmax fleet totaled 383 vessels (58.5 million dwt) as of September 30, 2009. The Suezmax orderbook was 145 vessels (22.6 million dwt) at September 30, 2009, representing 39% of the existing Suezmax fleet, based on deadweight tons.

                                                                       Form 10-Q

               OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

Operations (continued)

International Flag Aframaxes

                         Spot Market TCE Rates
                      Aframaxes in the Caribbean*
            Three Months Ended           Nine Months Ended
               September 30,                September 30,
             2009           2008          2009          2008
Average   $    3,500      $ 43,200     $   12,300     $ 44,200
High      $    8,500      $ 72,000     $   73,000     $ 95,000
Low       $    1,000      $ 16,600     $    1,000     $  5,200

*Based on Caribbean to the U.S. Gulf and Atlantic Coasts

Rates for Aframaxes operating in the Caribbean during the third quarter of 2009 averaged $3,500 per day, approximately 90% below the third quarter of 2008 and 60% below the average for the second quarter of 2009.

Aframax employment and freight rates in the third quarter were adversely impacted by higher than normal planned refinery maintenance activities. Third quarter North Sea production declined by approximately 400,000 b/d compared with the third quarter of 2008 due to heavy maintenance activities in addition to normal field declines. FSU crude oil exports from the Baltic Sea during the third quarter were curtailed by maintenance work on the Russian pipeline system. The combination of diminished volumes from the Baltic and North Seas forced tankers to seek employment elsewhere, including the Caribbean.

Reduced refining throughput levels in the U.S. and Europe in the third quarter and first nine months of 2009 limited demand for Aframaxes. A decline in Mexican crude oil production further reduced employment opportunities for Aframaxes trading in the Atlantic Basin.

A sizable expansion in the Aframax fleet in the first nine months of 2009 presented increased competition for cargoes during a period in which demand for oil was already weak and exportable oil supplies were below year ago levels. The world Aframax fleet reached 837 vessels (87.6 million dwt) at September 30, 2009. The Aframax orderbook was 174 vessels (19.1 million dwt) at September 30, 2009, representing 22% of the existing Aframax fleet, based on deadweight tons.

International Flag Panamaxes

                        Spot Market TCE Rates
                 Panamaxes - Crude and Residual Oils*
            Three Months Ended           Nine Months Ended
               September 30,                September30,
             2009           2008         2009          2008
Average   $     8,500     $ 37,900     $  14,600     $ 33,800
High      $    20,000     $ 41,000     $  38,000     $ 53,800
Low       $         0     $ 34,500     $       0     $ 14,300

*Based on 50% Caribbean to U.S. Gulf and Atlantic Coasts and 50% Ecuador to U.S. West Coast

Operations (continued)

Rates for Panamaxes that move crude and residual oils averaged $8,500 per day during the third quarter of 2009, approximately 80% below average rates in the corresponding quarter of 2008, and 40% below the second quarter of 2009.

Changing supply patterns caused by the reversal in the direction of crude oil flow through the Trans-Panama pipeline adversely affected Panamax tanker rates. This pipeline was constructed to move Alaskan North Slope crude to U.S. Gulf Coast refineries. The recent reversal in crude flows from East-to-West allows oil from South America and West Africa to flow through the pipeline into newly expanded storage facilities on the west coast of Panama,reducing the demand for Panamax tankers to ship crude oil from Ecuador to U.S. West Coast refineries. In addition many of the cargoes that moved from Ecuador to U.S. West Coast refineries (a 21 day voyage) are now being delivered to storage facilities in Panama (5 day voyage), where larger size tankers are then used. This has further reduced demand requirements for Panamax tankers in this trade.

Fuel oil trading opportunities in the Caribbean also decreased during the first nine months of 2009. Natural gas in the U.S., on a BTU basis, has been cheaper than fuel oil and has, therefore, replaced fuel oil in power and manufacturing plants that are capable of operating with either fuel.

The world Panamax fleet at September 30, 2009 stood at 441 vessels (30.8 million dwt). The current Panamax orderbook of 98 vessels (6.9 million dwt) at September 30, 2009 represents 22% of the existing Panamax fleet, based on deadweight tons.

International Flag Handysize Product Carriers

                        Spot Market TCE Rates
                     Handysize Product Carriers*
            Three Months Ended          Nine Months Ended
               September 30,              September 30,
            2009           2008         2009          2008
Average   $   3,000      $ 23,300     $   6,900     $ 22,900
High      $   7,100      $ 34,600     $  18,200     $ 35,800
Low       $       0      $  9,400     $       0     $  9,400

*Based on 60% trans-Atlantic and 40% Caribbean movements to the U.S. Atlantic Coast

Rates for Product Carriers operating in the Caribbean and trans-Atlantic trades averaged $3,000 per day during the third quarter of 2009, about 85% below the average for the third quarter of 2008 and 55% below average rates for the second quarter of 2009. Product Carrier rates for the first nine months of 2009 averaged 70% below those realized during the same time period in 2008.

In the third quarter of 2008, Product Carrier rates benefited from arbitrage opportunities for diesel in Europe, South America and China and arbitrage opportunities for gasoline in the U.S. Weaker demand for all products in 2009 led to a reduction in refinery runs in Europe and the U.S. curtailing trans-Atlantic movements, including gasoline from Europe to the U.S. and diesel exports from the U.S. to Europe compared with year-ago levels.

Operations (continued)

Intra-Asian product movements declined due to reduced demand requirements and the start-up of new refining capacity in countries such as Vietnam that significantly reduced product import requirements. In addition, decreased demand for petrochemicals resulted in a decline in naphtha shipments to Asia. This decrease in tonne-mile demand for Handysize Product Carriers relative to a year ago occurred at the same time that a large number of newbuildings entered the market, placing a considerable amount of downward pressure on Product Carrier rates.

The current price contango in middle distillates resulted in a total of approximately 80 vessels (LR1s and LR2s) being used to store products. The use of tankers as floating storage will likely continue for as long as prices for middle distillates remain in contango, since land-based storage is either filled or more expensive than utilizing tankers.

The world Handysize fleet reached 1,536 vessels (65.3 million dwt) at September 30, 2009. The orderbook now stands at 375 vessels (17.4 million dwt), equivalent to 27% of the existing Handysize fleet, based on deadweight tons.

U.S. Flag Jones Act Product Carriers

                               Average Spot Market TCE Rates
                       Three Months Ended          Nine Months Ended
                          September 30,              September 30,
                        2009          2008         2009          2008
45,000 dwt Tankers   $   33,100     $ 39,700     $  37,200     $ 57,500
30,000 dwt ATBs      $   23,000     $ 23,900     $  25,200     $ 37,400

The rates for Jones Act Product Carriers and ATBs averaged $33,100 per day and $23,000 per day, respectively, during the third quarter of 2009, approximately 17% and 4% below their respective third quarter 2008 rates. Rates for both vessel types were, however, approximately 4% above their second quarter 2009 rates.

The decline in rates relative to 2008 primarily reflected weaker demand for products in 2009 that resulted in reduced spot tanker requirements and longer waiting times for cargoes. U.S. Gulf Coast refinery utilization levels in 2009 have been consistently below those of one year ago except for September 2008, when hurricanes caused damage to the refinery infrastructure and utilization rates fell to 60%. The percentage decline in TCE rates for ATBs was less than for Product Carriers as weak freight rates were significantly offset by the lower cost for diesel fuel for ATBs.

Tanker and ATB freight rates during the third quarter of 2009 were somewhat buoyed by maintenance activities at Irving Oil's New Brunswick refinery in Canada, which resulted in a reduction in exports of gasoline and middle distillates from that facility to U.S. East Coast markets. This increased demand for Jones Act vessels to transport additional cargoes from U.S. Gulf Coast refineries to East Coast markets.

Operations (continued)

The Delaware Bay lightering business transported an average of 230,000 b/d during the third quarter of 2009, down about 3% from the third quarter of 2008. Third quarter volumes were the highest quarterly lightering volumes so far this year due to low water levels at a customer's refinery that necessitated additional lightering. Lightering volumes during the first nine months of 2009 were approximately 20% lower than last year reflecting a decline in East Coast refining utilization rates to 73% from 82% in the first nine months of 2008.

One Jones Act vessel was delivered in the third quarter of 2009, resulting in 68 vessels that were available for trading in the Jones Act coastwise market at the end of the quarter. Four more vessels are expected to be delivered in the fourth quarter, which would result in a year-end Jones Act fleet of 72 vessels. There were nine Jones Act vessels in lay-up at the end of the third quarter of 2009.

At the end of the third quarter of 2009 there were 19 tankers and barges in the 160,000 to 420,000 barrel size range on order and one additional barge scheduled for conversion. There are 17 vessels that will be phased out in accordance with OPA 90 regulations and four additional double-hull vessels that will be likely be retired in the next nine to 24 months due to commercial obsolescence.

Outlook

. . .