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Saudi Diesel is a threat to Asia

Saudi output threatens Asia glut

Nevertheless, refiners in Asia will have to find alternative buyers for fuel they have been selling to Saudi Arabia in increasing quantities over the last five years, traders say.

December 19, 2012 10:18 by



DISPLACING SUPPLIERS

Neighbouring OPEC producer the United Arab Emirates (UAE), is also planning a big expansion in diesel production, with Abu Dhabi Refining Company (TAKREER) working to more than double capacity at its existing 415,000 bpd refinery at Ruwais.

The boom in Gulf product exports aimed at Europe and Asia will further intensify competition between suppliers.

India currently exports about 1.5-1.7 million tonnes of diesel a month, mostly to Europe and Africa, because giant Indian refiner Reliance is able to meet Europe’s stringent diesel specifications.

New refineries starting up in two major Middle Eastern crude oil producing countries pose a big threat to Indian refiners that sell finished products to Europe, with the competitive advantage of two of the refineries on the Red Sea coast of Saudi Arabia further reinforced by lower shipping costs, traders said.

In the Gulf, where shipping costs to Europe are also lower than from India, Abu Dhabi National Oil Company (ADNOC) is already planning to offer diesel with a sulphur content of 10 parts per million (ppm) for 2013 contracts, making it the first Gulf producer to export ultra-low sulphur diesel on a term basis.

Traders say Saudi Aramco Total Refinery and Petrochemicals Company (SATORP), the joint venture that owns the Jubail refinery, will also be offering cleaner diesel for export as early as the second quarter of next year.

“What we might see happen in the short term is Reliance shifting its barrels into tanks, which could depress margins, and eventually it might adjust its production to maximise gasoline or higher sulphur gasoil,” a source in India said.

With East African demand rising due a lack of refining capacity, India could divert more of its production to that region, another India-based source said.

In the short term, some of the extra barrels from the Middle East could be shipped into the Singaporetrading market to feed growing demand from Australia and compensate for fewer exports from Japan, said Victor Shum, managing director of downstream energy consulting at IHS in Singapore.

Australia has been importing more diesel after shutting old refineries, while Japan is likely to cut diesel exports from next year.

“So there will be some re-balancing but there will still be a lot of competition for markets simply because it is still going to be a relatively weak global demand market,” Shum said.

With demand from Pakistan, Bangladesh and Sri Lanka also rising, long term growth in domestic demand on the Indian sub-continent could soak up any Indian diesel displaced by increased exports from Gulf members of the Organization of the Petroleum Exporting Countries (OPEC).

More Middle East supplies sent to Europe could also pressure refineries in the Mediterranean, which are already struggling with low profit margins for refining increasingly costly crude into vehicle fuels for a shrinking EU market.

“Europe’s already receiving diesel from the United States and Russia, so this could put pressure on refinery margins in the Med,” a middle distillates trader said.

“But overall, Asian diesel margins will probably come under pressure from all the additional diesel barrels expected to flood the market, as I don’t think the increase in demand can keep pace.”



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