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Fuel oil market supported by strong power generation demand: IEA

London — The fuel oil market has been supported recently by increased demand from the Middle East and Asia for power generation, the International Energy Agency said in its monthly oil market report.

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"Fuel oil markets display strong backwardation on lower global supplies of heavy crudes, high temperatures in the Middle East and declining stock levels in Singapore," the IEA said.

Saudi Arabia, OPEC's largest producer, has dominated the high sulfur fuel oil market to met air conditioning needs in the hot summer months, pulling in an estimated 1.5 million-2 million mt per month since June, according to trading sources.

The August/September 3.5% FOB Rotterdam spread was last bid at $5.25/mt on ICE and offered at $6.00/mt, with September/October last traded at $5.25/mt.

Singapore's commercial stockpile of residues hit a nine-year low of 14.799 million barrels in the week ended August 1, latest IE Singapore data showed.

Trade sources said fuel oil arbitrage volumes from Europe and the US to Singapore were lower than usual in July because Saudi Arabia's buying had shut the arbitrage window, given the narrow price spread between Singapore 380 CST HSFO and 3.5% FOB Rotterdam barges.

The August 3.5% FOB Rotterdam barge crack -- the spread between 3.5% FOB Rotterdam barges and front-month Brent crude futures -- was last traded on ICE at minus $8.13/b. It hit minus $16.32 on April 29.

In Pakistan, requirements fell from 180,000 b/d in May to 140,000 b/d in June, and it was predicted that power producers will use 115,000 b/d of fuel between April and September, the IEA said, citing data from the Pakistan Oil Companies Advisory Council.

Pakistan ended a ban on fuel oil imports in April to address the issue of power cuts as energy consumption rises in the summer season.

The government halted power generation from oil-fired units with a combined capacity of more than 4 GW last October and halted fuel oil imports in December as part of a drive to push for cleaner energy from fuels such as LNG.

Iraqi fuel oil demand in May increased 90,000 b/d on the year in May, though direct use of oil fell 145,000 b/d as more natural gas from Iran became available, the IEA said.

--Tamara Sleiman, tamara.sleiman@spglobal.com

--Edited by Dan Lalor, daniel.lalor@spglobal.com