Saudi Arabia could be vital to fuel oil's hazy future: S&P Global

Saudi Arabia could be an answer to the challenges awaiting the high sulfur fuel oil (HSFO) market once interest for this product wanes due to implementation of a global marine sulfur cap, an analysis by S&P Global Platts said.

As demand shifts away from 3.5 percent HSFO in the bunker market to cleaner marine fuels due to the International Maritime Organization's (IMO) global 0.5 percent marine sulfur cap from 2020, Saudi Arabia could emerge as one of the main outlets for this product.

Demand of the world's largest crude oil exporter has been the driving force behind the strength of the European fuel oil complex this summer.

The fuel oil arbitrage from Europe into the Red Sea is a seasonal summer trend from April to October when Saudi Arabia and other Middle Eastern nations buy fuel oil to power air-conditioning. But with Saudi significantly increasing its desalination capacity, buying interest is expected to emerge even in the winter months, the report said.

"Saudi Arabia -- who stands to lose from the IMO regulation given the elevated sulfur content of its crude -- offers the largest potential source of such fuel oil absorption in our view," said Goldman Sachs in its recent report IMO 2020 -- Challenging but Solvable.

The Kingdom uses domestically produced crude for power generation and at its desalination plants, although cheap fuel oil is an attractive alternative feedstock when looking to sell crude at a premium.

Earlier this year, the kingdom announced plans to build nine desalination plants in the Red Sea area.

Saudi Arabia has the world's largest desalination capacity, accounting for around a fifth of global capacity, the International Water Summit said in a recent report titled 2018 Energy Efficient Desalination report.

“With fuel oil prices expected to decline sharply post 2020 as demand slides for HSFO, the market is banking on the Middle East to take advantage of cheap fuel oil cargoes for power generation,” S&P Global Platts added.