SAUDI ARAMCO in July shipped fuel oil from Rotterdam in Northwest Europe to its Red Sea port of Yanbu to meet peak domestic summer demand, taking advantage of arbitrage economics that have been favourable up until recently.

Analysts said the move was part of a drive to replace crude oil with fuel oil use in its power generation mix during the peak summer, in order to maintain maximum spare crude export capacity.

The move, an unusual one for Saudi Aramco, which typically exports about 775,000 tonnes of fuel oil per month, confirmed the view of Barclays Capital research that the upswing in power demand in the country this summer would probably have been met by increased fuel oil burn.

Saudi Arabia was seeking to minimise its domestic crude burning for power generation in order to keep maximum spare crude export capacity, in a year with very little spare export capacity globally, according to Miswin Mahesh, an analyst at the bank.

However, some traders questioned the financial wisdom of buying fuel oil in Northwest Europe for power generation.

The Northwest European fuel oil barge crack has narrowed sharply, in part due to falling crude prices, trade sources say, but also due to an open arbitrage to Singapore, which is taking product out of the region. Fuel oil continues to price at a discount to Brent crude oil. However, traders questioned whether this discount would be enough to offset the freight costs of bringing a cargo from Northwest Europe to Saudi Arabia.

Regardless of current market conditions, the buying activity was part of a longer-term plan, some market observers say.

“You can’t switch between fuel and crude burning in a week or two,” another trader said. “The decision was probably made four or five months ago.”