Gasoline Update: Mideast boom squeezes gas oil flow to Europe
Mon Jul 3, 2006 12:51 PM ET
By Iain Pocock and Felicia Loo
LONDON/SINGAPORE (Reuters) - An oil fueled economic boom in Middle Eastern countries is driving local demand for gas oil such as diesel, squeezing supplies to Europe and Asia.
This has tightened supply in both importing regions and forced prices of gas oil up this year to around record levels.
The trend is set to continue until new Gulf refineries come onstream later this decade, traders and analysts said.
Accelerating growth and a construction boom in countries including Qatar and Saudi Arabia have boosted domestic consumption just as the global refining industry is already straining to meet existing demand, particularly from Asia.
The United Arab Emirates' economy grew more than a quarter last year, while Saudi Arabia and Egypt are forecasting growth of at least six percent this year.
"The whole system is quite strained, and the increasing domestic demand in the Middle East is just one piece of the whole puzzle," said Tobias Merath, commodities research analyst at Credit Suisse. "But it's playing directly in there."
"Since April, gas oil prices have been consolidating, but at a higher level."
London IPE front month gas oil futures have held above $600 a tonne since mid-April, more than $60 above average prices during the first quarter of the year, and $100 above year-earlier levels.
In Asia, gas oil prices have held at record levels above $80 a barrel since April, as reduced flows from the Middle East compounded a tighter market in the second quarter during a heavy round of refinery maintenance.
Gas oil includes heating oil and jet fuel as well as diesel.
Countries such as Saudia Arabia have been swing suppliers in recent years that can ship cargoes east or west depending on the economics. Rising domestic demand is changing that pattern.
"The Middle East is seeing a lot of import requirements for 0.25 percent sulphur gas oil," a Geneva-based trader said. "Demand is healthy and expected to remain so during the hot summer season."
TENDER BUYING
Egypt last month tendered to buy nearly 700,000 tonnes of 0.5 percent sulphur gas oil -- the kind favored in many Asian countries as a motor fuel -- for the second half of this year. This was up almost half from the same time a year earlier.
Qatar, which exports large volumes of distillates, in June issued a rare gas oil buy tender for third quarter delivery.
The country is in the midst of a construction boom ahead of its hosting of the Asian Games at the end of this year.
"We have been seeing signs of increasing demand for products in the local market, especially for diesel," said Adel Almoayyed, general manager of marketing at Bahrain Petroleum Co.
"The increase was more marked during 2005 and is caused by the high construction activities over the past few years."
Saudi Arabia may continue to skip spot diesel flows to Asia until year-end as most of its exports are committed to long-term contract customers, traders said.
Saudi state owned company Saudi Aramco, which last sold 120,000 tonnes of spot diesel for April loading, used to export one or two spot cargoes of diesel each month.
"Certainly in the Gulf and Saudi Arabia, demand for transport fuel is picking up," said Mohamed Ramady, a visiting finance and economics professor at King Fahd University of Petroleum and Minerals in Saudi Arabia.
The country cut domestic transport fuel prices by as much as a third from the beginning of May.
"This really gave a boost to the private sector, and we are seeing a lot of demand recently," Ramady said.
As well as rising demand to counter the summer heat and feed the region's economic growth, moves by governments to diversify their economies away from reliance on oil production have further fueled local consumption.
"Middle Eastern countries are trying to leverage their oil reserves and energy reserves," Merath said. "They are trying to attract energy-intensive industries like fertilizer and aluminum industries."
The Saudi government in April approved the construction of an aluminum smelter, two months after the UAE unveiled plans for a $6 billion smelter complex.
Rising regional consumption, combined with healthy demand in the Far East, drove Asian prices above European levels for most of the second quarter to attract cargoes eastwards.
This was the longest period Asian gas oil prices have stayed above European levels since early 2004.
As prices in the Far East rose to compete for gas oil, the reduced flows to Europe exacerbated perceptions of tightness there in recent months, prompting several sudden spikes in gas oil prices, traders said.
Mediterranean gas oil price premiums surged more than five fold in four trading days in early May after a pipeline fire forced the closure of an ERG <ERG.MI> refinery in Sicily.
Still, while rising Middle East demand looks set to continue to support prices for now, new refinery construction in the region, as well as Asia, should ease the impact in coming years.
Construction of at least 3 million barrels per day of export-oriented refining capacity has been proposed in the Middle East, Egypt and India, representing $30 billion of investment, although not all the projects would reach fruition, Citigroup said in a report published in April.
"Countries are not only attracting energy-intensive industries, they're also building more refineries there to take advantage of the refining premium," Credit Suisse's Merath said.
"If you look a bit further ahead, we see crude oil markets and energy markets becoming a little less tight." |
