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Middle East oil products use, once an engine for global growth, set for record drop, analysts say

Highlights

Middle East oil products demand seen falling 2.9% to 5% in 2020

Jet fuel and gasoline hardest hit products

Saudis using more natgas for power generation to boost crude exports

Dubai — The Middle East's consumption of oil products from gasoline to jet fuel will add to pressures on global oil demand for this year as countries led by the energy-dependent Gulf region face economic slowdown, extended lockdowns and an oil price crash that will slam budgets already constrained by the coronavirus pandemic.

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Demand for oil products in the region will drop by a record 2.9% this year, with jet fuel/kerosene consumption plunging 15% and gasoline use falling by almost 6%, according to latest estimates from S&P Global Platts Analytics. The region covering 14 countries including Saudi Arabia, Bahrain, the UAE and Iran had contributed to global oil demand growth in 27 of the past 29 years. This year, global oil demand is set to contract for the first time in 11 years.

"Curfews, lockdowns and other restrictions will have a consequential impact on Middle East oil demand this year -- especially this month -- as businesses shut down temporarily and people stay at home," Audrey Dubois-Hebert, a consultant at FGE Energy, said in a recent interview.

FGE is forecasting an even deeper contraction of 5% in Middle East demand for the main oil products, which is projected to average 6.1 million b/d this year.

Efforts to contain the coronavirus pandemic led governments to slash air traffic leading jet fuel demand to plummet while gasoline consumption is slumping as business activity and travel across the region remain restricted.

Economic contraction

Economic conditions in Saudi Arabia, the biggest Arab economy, are sliding after the lockdown was extended while conditions in the UAE, the second-largest Arab economy, are signaling contraction.

Saudi Arabia's non-oil private sector contracted in March at its fastest rate on record as the seasonally adjusted IHS Markit Saudi Arabia Purchasing Managers' Index fell to 42.4 -- the biggest drop since the survey began in August 2009. A reading below 50 signals contraction, while above 50 an expansion.

It was a similar picture in the UAE.

The seasonally adjusted IHS Markit UAE Purchasing Managers' Index fell to 45.2 in March from 49.1 in February, the biggest contraction on record

Economies across the Middle East are shrinking as oil prices have tumbled some 60% this year as the coronavirus pandemic caused oil demand to crash. The US Energy Information Agency is projecting global liquid fuels consumption this year will average 95.5 million b/d, down 5.2% from 2019, or the largest percentage decline in global oil consumption since at least 1990.

Oil exporters stand to lose $192 billion in crude revenue this year based on an oil price of $40/b, according to projections from the Institute of International Finance. The Middle East and North Africa region are forecast to suffer from recession for the first time in three decades, according to the IIF.

The six members of the Gulf Cooperation Council -- many of which were already struggling to balance their budgets -- are expected to see ballooning fiscal deficits as the oil price crash diminishes oil incomes while spending rises to combat the coronavirus pandemic, an International Monetary Fund official told Platts last month. Even before the price crash this year, Bahrain was forecast to have a breakeven oil price of $91.8/b in 2020, with Qatar having the lowest at $45.70/b, the IMF said in its October regional economic outlook. Brent was recently about $33/b.

Crude burn

With the gloomy economic picture, jet fuel demand has dived and gasoline is set to be the second-worst affected oil product, according to analysts.

"With increased self-isolation, gasoline demand will be down but gasoil and petrochemicals demand may remain slightly more resilient as countries try to sustain industrial activity despite the global slowdown," Chris Midgley, head of Platts Analytics, said.

Iran's gasoline consumption averaged only about 40 million l/d during the annual new year celebrations in late March, compared with about 100 million l/d during last year's holiday, according to data cited by the country's first vice president Eshaq Jahangiri.

Even crude oil burn in power generation, which typically soars in summer when air conditioners are cranked up, may decline this year, analysts say. This is especially true for Saudi Arabia which is ramping up natural gas production for power generation.

"Saudi Arabia used to consume close to one-third of its oil production and plans indeed to reduce this by continuing switching power generation from oil to gas," Per Magnus Nysveen, head of analysis for Rystad, said.

Saudi Arabia's energy reforms such as cutting subsidies will reduce domestic crude oil consumption by 2 million boe/d by 2030, energy minister Prince Abdulaziz bin Salman said in October.

Saudi Arabia wants to produce 70% of its power from gas and 30% from renewable energy to reduce domestic consumption of crude and free up the commodity for export. The Saudi energy ministry said last month increased crude exports were made possible by the new 2.5 Bcf/d Fadhili gas processing facility and associated power plant that has freed up 250,000 b/d of crude. The Fadhili 1,507 MW combined heat and power plant in the Eastern Province of the country was commissioned on January 20.

"The development of the Fadhili gas project in Saudi Arabia will support increased use of natural gas in the power sector, and we do expect further declines in crude burn this year," Iain Mowat, principal analyst at Wood Mackenzie, said. "This will support the increased availability of crude oil for export."