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Mideast Boom Squeezes Gas Oil Flow to Europe, Asia

Source: reuters 7/3/2006, Location: Middle East

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."

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 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."

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