Saudi Arabian Oil Co., or Saudi Aramco, is shipping fuel oil from Northwest Europe to the Red Sea to meet Saudi Arabia’s peak domestic summer demand, taking advantage of arbitrage economics that have been favorable up until recently. Barclays Capital projected earlier this year that Saudi Arabia could turn into a net importer of fuel oil instead of exporting an average volume of 775,000 tons a month.
The first cargo from Rotterdam this year–believed to have been bought from Litasco–aboard the 100,000-deadweight-ton Montego is due to land at the Red Sea port of Yanbu this week, and the company is on the hunt for a second cargo in Europe, but a deal has yet to be finalized, several traders said.
“They are just taking advantage of being able to land Rotterdam barrels into the Red Sea more cheaply than their own Middle East barrels,” said a senior European fuel oil trader.
But since it loaded the first cargo around mid-June from Rotterdam, the East-West spread has narrowed sharply, closing the arbitrage window for most players, and it remains to be seen whether Aramco can still find value in the move. The exit of large volumes of fuel oil from Rotterdam in first-half July and weaker sentiment in the Asian market have helped shut the arbitrage.
The East/West spread for August was valued at $35.25 a metric ton Friday.
In the meantime, Aramco is heard to have chartered the 90,000-ton Ioannis to ship fuel oil from Ras Tanura to Yanbu loading mid-July, which will be at least its third shipment of fuel oil from the Persian Gulf to the Red Sea. Earlier, Aframax Poul Spirit was heard to have loaded from Jubail end-June and is currently on its way to Yanbu, while Aramco is believed have chartered the 80,000-ton Neverland Dream for the Ras Tanura-Yanbu voyage loading around June 10.
Aramco has sharply cut fuel oil exports, as the country is burning more of the residual fuel this year to generate power. It was heard to have sold only one fuel oil cargo in June and has not offered any cargoes for July so far, said a senior Middle East trader.
Barclays Capital projected earlier this year that Saudi Arabia could turn into a net importer of fuel oil instead of exporting an average volume of 775,000 tons a month.
But exports out of the country aren’t likely to dry up. Royal Dutch Shell and ExxonMobil have continued to offer fuel oil for export out of the country as tax issues discourage Aramco from buying and re-importing those barrels. Saudi Aramco typically buys fuel oil in the Middle East or ships cargoes from the Mediterranean to meet peak summer demand.
Market Watch/The Wall Street Journal, 9 July 2012