The Middle East fuel oil market is braced for a tightening third quarter as soaring power generation demand is set to curb Saudi Arabia's exports and Western sanctions could deprive the market of Iranian supplies.
But although tighter supplies should push Gulf fuel oil premiums higher and could lift the Singapore ship fuel bunkering market, fears of regional fuel oil shortage are unfounded, traders and analysts in the Middle East and in Asia say.
"Saudi Arabia is likely to remain a large net exporter of fuel oil, with much of this going to Asia," Riyadh-based HSBC analyst John Tottie said.
"As we go into the summer season, the import of lower-sulphur fuel oil may increase, just as it did in 2011... Yet the kingdom is likely to remain a large exporter of high-sulphur fuel oil, given the high fuel oil yield of Saudi's oil refineries."
Barclays Capital said in a note last week that Saudi Arabian plans to slash crude use for power generation may turn it into a net importer of fuel oil this summer.
"With Iranian volumes likely to be curtailed severely following the sanctions and with the risk that Saudi Arabia turns into a net importer of fuel oil, more than 1 million tonnes of fuel oil exports are at risk of being lost from the market," London-based analyst Mishwin Mahesh said.
Asia-based traders who also rely on Middle East fuel oil do not expect major shortages as they anticipate increased fuel oil shipments into East Asia from other producers.
Industry players still point to Western arbitrage cargoes as remaining the main bearish factor for east Asia's fuel oil market.
"Together those two factors — fall in supplies from Saudi and Iran could be very bullish," a Singapore-based trader said. "But it will also depends on Singapore strength."
Asia's fuel oil market fell sharply in early March under the weight of heavy supplies and slow demand.
Spot cash premiums for the 180 centistoke (cst) and 380 cst grades have since improved to above $2 a tonne though, recovering from a discount low of 10 cents and 50 cents respectively as Western imports fell to three-year low levels in April.
Saudi Arabia's plan to reduce direct crude burn for power generation and rely more on natural gas and fuel imports this summer could result in a drastic drop in its monthly average fuel oil exports of around 500,000 to 600,000 tonnes.
But several Gulf-based traders say the drop in supply from the leading fuel oil exporter was unlikely to shock the market, thanks to ample Saudi stocks and alternative fuels.
"They have been building inventories of gasoil, which they will use in summer," one-Gulf based fuel oil trader said. "It also depends on how much gas they can obtain from the fields."