Saudi Arabia may turn to gas, import more fuel oil for power as OPEC+ cuts ease

Dubai — Saudi Arabia is expected to turn to natural gas associated with crude oil production and boost fuel oil imports to take advantage of plentiful supplies as eased OPEC+ cuts take effect this month, allowing the kingdom to divert more crude oil to exports rather than to burn for power generation during the hot summer months.

Saudi Arabia typically burns more crude for power generation as temperatures rise in summer months, boosting demand for electricity to run air conditioners and for water desalination.

Last year, crude burn for use in the kingdom peaked to 702,000 b/d in August and was down to 335,000 b/d by February 2021, according to the Riyadh-based Joint Organisations Data Initiative, or JODI. Fuel oil and natural gas can also be used for power generation.

"Compared with last summer, we estimate that Saudi Arabia will likely slow crude burn this summer as there will be more supply of associated gas as OPEC+ cuts ease and potentially more use of fuel oil," said Zhuwei Wang, lead Middle East analyst at S&P Global Platts Analytics. Gas accounts for about 60% of power feedstocks in the Middle East, with crude, gasoil and fuel oil making up 20% to 30%, he estimated.

OPEC+ has begun easing quotas that had largely been frozen since January, lifting caps by 350,000 b/d for May. Saudi Arabia is also unwinding its extra 1 million b/d voluntary cut by 250,000 b/d for the month. More increases are scheduled for June and July, in anticipation of rising global demand.

A source close to state-owned Saudi Aramco declined to comment on the kingdom's fuel mix consumed for power generation and desalination plants, saying it was a matter of national security, although any increase in fuel oil imports into the country at this time is normal "as we move into summer."

Its April volumes were mostly for fuel oil term contracts from Europe, "plus we purchased some volumes from the US as well," the source said. Saudi Arabia typically buys fuel oil of 3.5%-3.7% sulfur and 380 CST viscosity.

Singapore-delivered 380 CST HSFO fell to a premium of $4.24/mt over FOB cargoes in the city-state on May 7, the lowest since May 16, 2019, according to S&P Global Platts data. Although a market source said that the delivered-basis 380 CST market has been "quite depressed," most buyers have yet to cover demand for Q3 2021. "With some HSFO tenders still ongoing, there could be some upside for HSFO demand ahead," said a trader, adding high inventories and weak spot demand pose a downside risk.

At the Middle East's Port of Fujairah, 380 CST HSFO is available for deliveries within seven days amid plentiful supplies. "Although the market is well-supplied with HSFO, it has helped ensure that deliveries can be made without disruptions," said a Fujairah-based trader.

Market sources were optimistic over expectations of increased demand of HSFO in the upcoming weeks ahead of fixtures for yearly term contracts. A Fujairah-based trader said that the inflow of tenders for the summer months will begin "within the next two weeks," mainly for 380 CST HSFO term fixings.

JODI data showed that Saudi Arabia's February fuel oil imports stood at 513,000 mt, almost 23% lower on the month, as domestic demand for fuel oil fell to a three-year low of 1.74 million mt.

Much of the demand for air conditioners and water desalination during summer comes from the Riyadh and western regions, which are distant from the major gas fields in the Persian Gulf, according to Homayoun Falakshahi, senior commodity analyst at Kpler.

The development of the 2.5 Bcf/d Fadhili gas plant as part of the giant Wasit gas complex has allowed for increased crude exports, he noted. The new Jizan refinery on the Red Sea also has a capacity to produce 160,000-220,000 b/d of fuel oil.

"As production cuts are eased and the Jizan refinery ramps up, conditions will then be certainly ripe for lower fuel oil imports, but that won't happen this year in time for peak fuel oil buying for summer power generation demand," Falakshahi said.