Middle East's summer 'oil burn' under spotlight as OPEC+ cuts bite

The Middle East is ramping up its use of oil for power generation as air conditioning demand hits peak summer levels, at a time when OPEC+ countries are aggressively slashing their crude production.

The seasonal consumption figures could significantly shrink the amount of crude the region will be able to export, but analysts say the oil burn is likely to be somewhat smaller than in previous years due to an expansion in gas availability.

In total, the region's crude consumption for electricity is expected to peak in the third quarter at 868,000 b/d, according to Dong Wang, Middle East oil markets analyst for S&P Global Commodity Insights. That is down from the 902,000 b/d of crude burned in the same quarter of 2022.

Saudi Arabia, the largest contributor to crude burn in the Middle East, is forecast to consume 582,000 b/d of crude in its power sector this summer, marginally below last year's average of 591,000 b/d for the quarter, S&P Global estimates.

Saudi Arabia's softening of crude burn is a combination of adding more gas into its energy mix as well as imports of cheap fuel oil from Russia, said Homayoun Falakshahi, a senior analyst with Kpler, which sees the kingdom's power sector consumption at 600,000 b/d of crude in the summer, down 80,000 to 90,000 b/d year on year.

The kingdom has increased its intake of Russian fuel oil and diesel in recent months as Moscow has had to scramble for new markets and discount its cargoes, in response to Western sanctions over the war in Ukraine.

Russian exports of fuel oil and diesel to Saudi Arabia climbed to an all-time high of 284,000 b/d in April, according to shipping data from Kpler. The volumes continue to flow, reaching 188,000 b/d in May and 192,000 b/d in June.

The Saudi energy ministry was not immediately available for comment on its planned summer burn and imports of fuel oil.

In April, Saudi Arabia said it would slash 500,000 b/d of its crude production in concert with several OPEC+ allies, which are contributing an additional 1.2 million b/d of their own cuts, in a bid to tighten the market and reverse a slump in oil prices.

The kingdom then said it planned to make a unilateral 1 million b/d cut for July and August, bringing production down to a two-year low of 9 million b/d.

The cuts, along with the crude burn, will make much less Saudi crude available for export. Saudi Arabia exported 6.928 million b/d in May, according to figures the kingdom self-reported to the Joint Organizations Data Initiative.

Iraqi woes

Iraq, the region's second-largest oil producer, is expected to burn 245,000 b/d of crude for electricity in the third quarter, compared with 281,000 b/d in the same period of 2022, S&P Global estimates.

Iraq is facing an extreme summer with temperatures topping 50 degrees Celsius (122 F), with its war-damaged power infrastructure unable to cope with higher demand, leading to power cuts.

Baghdad is still dependent on Iranian gas and electricity imports to meet its growing demand. The two countries on July 12 signed an agreement in which Iraq would swap crude oil supplies for Iranian gas, but details on how it will work are scant, and US officials have said they are monitoring any transactions for compliance with sanctions imposed on Iran.

Baghdad currently imports 1.3 GW of electricity from Iran through four transmission lines.

Iraq also typically produces about 40,000 mt/d of fuel oil, of which about 26,000 mt/d is supplied to local power stations, cement factories and other local customers, though the country remains a net importer of refined products to meet domestic demand.

Without the gas and power supplies from Iran, Iraq would be forced to consume more of its own crude or even import more fuel oil to produce electricity, lessening the revenues it can earn from its lifeblood oil trade.

Iraq's crude production is subject to a quota of 4.22 million b/d under the OPEC+ agreement, after having produced as high as 4.9 million b/d in the months preceding the pandemic.

Any issue over payments is unlikely to threaten Iraq's imports of Iranian electricity in the near term over its particularly severe summer, former Iraqi electricity minister Luay al-Khateeb told S&P Global Commodity Insights.

"I think the Iranians will commit to supply Iraq gas and electricity during summer but will not wait afterward if nothing is received to pay off the outstanding [bills]," he said.

Kuwait's LNG imports

Kuwait, which has an OPEC+ quota of 2.548 million b/d, will see a softer crude burn during its peak demand season in 2023, with more LNG imports, analysts said.

S&P Global forecasts a crude burn of 39,000 b/d in the third quarter, compared to 29,000 b/d in the same period of 2022.

The country also uses a significant amount of fuel oil to general electricity, with total oil consumption hitting a high of 520,000 b/d in 2009 before declining to 365,000 b/d in 2022, according to the US Energy Information Administration.

Kuwait in February 2022 brought into service a second LNG import terminal at its Al-Zour port, allowing more gas to displace oil in its power sector.

"Kuwait's crude burn this summer will be softer as it turns to LNG for power generation," Wang said.