Saudi, Iran make use of fuel glut

Tamsin Carlisle

• Last Updated: February 03. 2009 7:46PM UAE / February 3. 2009 3:46PM GMT

A glut of refined petroleum products in Asia has prompted the two biggest Gulf oil exporters, Saudi Arabia and Iran, to make unusual purchases of gas oil.

While Saudi Arabia is using the fuel for power generation and transport, Iran is stockpiling it in tankers. The national Saudi petroleum company, Saudi Aramco, has agreed to buy about 3 million barrels of gas oil from the Japanese trader, Itochu, under a term contract to deliver the fuel to the kingdom from March to December, according to Reuters.

The transaction is unusual because the kingdom, which is striving for self-sufficiency in petroleum products, usually confines itself to buying spot cargoes of fuel when it runs short. It also usually purchases such cargoes from closer suppliers in the Mediterranean, India and neighbouring Middle Eastern countries.

Gas oil is a refined fuel similar to diesel, which Saudi Arabia has been importing for the past two years following a surge of infrastructure investment that has pushed up domestic fuel demand.

Reuters also reported that Iran was storing about 2 million barrels of gas oil bought from Asia in vessels moored in the Gulf. A source familiar with Iran’s fuel import programme said the country had been doing this for about two months, and would continue to buy because of low prices.

The deteriorating global economy has depressed oil demand in developed nations, including some Asian countries. Even developing economies such as China and Indonesia are scaling down fuel requirements. The resulting glut of fuel produced by Asian refineries has caused the region’s benchmark gas oil price to plunge nearly 70 per cent since July to about US$53 a barrel.

“At these prices, who wouldn’t be looking to lock in and build inventory levels,” an Asian trader said.

Iran lacks sufficient refining capacity to meet domestic fuel needs, and therefore relies heavily on international imports of refined products including petrol and diesel, although it often exports heavier grades of fuel oil, especially in summer.

Last year, freezing temperatures that increased demand for electricity amid disruptions to natural gas supplies had forced the country to cut back fuel oil exports in order to have more to burn in its power stations. This year, with prices low, Iran bought extra fuel from Asia ahead of winter to guard against another surge in demand. However, milder temperatures are keeping fuel demand in check, so some output from Iranian refineries is now being exported.

About 300,000 barrels of heavy fuel oil is due to flow to the UAE this month, with more expected to follow, Reuters reported, citing traders. The UAE is a major centre in the Middle East for blending petroleum products.

The Saudi situation is different, but also related to falling world oil demand.

There, the kingdom’s big cut in crude output, as it sought to stabilise oil markets, has resulted in the production of less natural gas from its oilfields. This, in turn, has increased the shortfall of domestically produced fuel for Saudi power plants and industry.

Saudi Arabia is pumping crude at its lowest level in more than six years. Its oil output averaged about 8 million barrels per day (bpd) last month, down from 9.7 million bpd in July.

Aramco has long planned to increase Saudi refining capacity to levels that would eliminate the domestic shortfall in petroleum products, but the credit crunch, following rapid inflation of construction costs last year, has delayed most of the kingdom’s refining projects.

tcarlisle@thenational.ae