Fuel Stockpiled for Iraq War May Swamp Asia, Lowering Prices

By Nesa Subrahmaniyan

Singapore, May 5 (<a href=quote.bloomberg.com>Bloomberg) -- Asian gasoil and jet-fuel markets face a glut after a shorter-than-expected war in Iraq left Saudi Aramco, the world's biggest oil company, and rival Kuwait Petroleum Corp. with unwanted supplies stored for military use.

Cargoes of diesel and jet kerosene are likely to head to Asia in the next two months as Middle East refiners look for buyers, according to a Bloomberg News survey of five oil refiners and traders. Kuwait Petroleum, which halted shipments of the fuels to Asia before the U.S.-led invasion, may resume exports this month.

``Oil products were stored for strategic purposes and now obviously, there's no need for that,'' said Abdallah Kharma, deputy head of international trading at China Aviation Oil (Singapore) Corp. Normal exports from the countries would be supplemented by fuel from reserves, he said.

An increase in supply of jet fuel would come after Asian airlines cut flights because of a viral outbreak that reduced travel demand. Severe acute respiratory syndrome has killed more than 400 people and infected more than 6,200, mostly in China and Hong Kong.

Asia's consumption of jet fuel, a type of kerosene, may decline between 5 percent and 10 percent between April and June compared with a year earlier, according to a Bloomberg survey last month of five oil trading companies, airlines and refiners.

SARS

The demand drop seems to be exacerbated because of SARS,'' said Katsunori Watanabe, director of research at Nihon Unicom Corp., a futures trading company in Tokyo. Jet fuel consumption is down in Asia by almost 20 percent.''

Asian carriers such as Cathay Pacific Airways Ltd. and Singapore Airlines Ltd. slashed a total of more than 650 weekly flights last month.

Fuel prices may also be hit by the decline in crude oil costs. Middle East oil producers pumped more crude in the first quarter to offset supply disruptions from Venezuela, crippled by a strike, and from Iraq during the U.S.-led invasion.

As Venezuelan and Iraqi supplies return to the market, the Organization of Petroleum Exporting Countries is trying to rein back those additional barrels to avoid a glut. The group said it will reduce output by 2 million barrels a day starting June 1 in an effort to stem a drop in prices.

Brent crude oil prices on London's International petroleum Exchange, which mirror Persian Gulf crude price movements, have fallen more than 27 percent since their March 12 peak.

Fuels

Jet-fuel and gasoil prices in Asia have fallen even faster. Prices of jet fuel declined by 34 percent in Singapore, Asia's biggest oil trading center, to $28.75 a barrel on Friday from this year's high of $43.35 on Feb. 10, according to Bloomberg data.

Diesel, or gasoil, used to fuel tanks and trucks, has fallen 30 percent to $29.05 a barrel from this year's high of $41.70 a barrel on March 10.

Kuwait, which has bases for U.S. and U.K. troops, may restart exports in May that were suspended earlier in case the supplies were needed by the military, Nader Sultan, chief executive of state-owned Kuwait Petroleum Corp., said in an April 15 interview. Kuwait produces about 120,000 barrels of jet fuel a day.

Naphtha supplies from the Middle East have also risen because the raw material for gasoline and chemicals was produced at the same time as the gasoil. State-owned Kuwait Petroleum, which normally sells naphtha to customers under annual contracts, sold 100,000 tons in the spot market for loading in April, a company official said earlier.

Saudi Aramco officials declined to comment on reports that it offered two cargoes in the spot market in April. Naphtha prices delivered to Japan have declined 44 percent to $218.13 a ton from this year's high of $388.50 a ton on March 10, according to Bloomberg data.

Demand

I don't think there will be a problem with supply, the problem is going to be demand,'' said Kharma of China Aviation. The picture is not going to be great, probably end-May, end-June because I think we have quite a bit of products coming out.''

In the first quarter, shipments from the Middle East slowed because a war premium boosted freight rates in the region as the U.S. geared up to attack Iraq.

The freight rate between the Arabian Gulf and Japan, measured in World Scale points, an industry benchmark, has fallen 6.8 percent to 275 on Friday after rising to a one-year high of 295 on April 14.

``The shipping rates will come down now and the war risk premium will come down,'' lowering the rate at which fuels can be profitably shipped to Asia, China Aviation's Kharma said. Last Updated: May 4, 2003 12:01 EDT