Saudis to be net importers of fuel oil

Saudi Arabia may become a net importer of fuel oil this summer

Commodity Online,

25 April, 2012

While there is a lot of focus in the market on the scale of Russian refinery upgrades, the tightening in the second half of the year is likely to come on changing dynamics in the Middle East. That Middle East fuel oil demand is particularly high in the summer is no news, yet trade flows are likely to change significantly this summer.

Fuel oil demand in the Middle East region has risen by about 2% annually over the past ten years, with Saudi Arabia accounting for a large part of that growth. However, in recent years, incremental power generation has been met by direct crude burn and, increasingly, diesel, lowering fuel oil demand growth significantly. In 2005, the gap between a low consumption point of 1.1 mb/d and a high of 1.5 mb/d was 370 thousand b/d. By 2009, that seasonal gap had more than doubled, from 1.5 mb/d to 2.4 mb/d, and by 2011, the gap had increased to an historical high of 750 thousand b/d.

However, the up swing in power generation in the country this summer is likely to be met by higher fuel oil usage, as the kingdom aims to rely as little as possible on direct crude burn at a time when global spare capacity is thin and the call on its crude exports is likely to remain high. Utilities have already started getting ready, expanding the number of units able to generate power from fuel oil. If the summer temperatures are high enough, there is a strong likelihood that not only will Saudi exports of fuel oil fall to zero, but it may even turn into a net importer. This in itself is a major swing factor for the fuel oil market as Saudi exports have averaged 775 kt/month over the past 14 months.

Though Saudi Arabia is in the process of adding almost 1 mb/d of refining capacity by the middle of this decade, Saudi demand for fuel oil will likely continue to rise despite the greater use of gas and solar in power generation and desalinisation.