Oil Demand Likely Up in Sweltering Middle East

Saudi Arabia raised its oil production to a record last month while much of the kingdom sweltered in record temperatures that have also hit neighbouring countries across the Middle East.

There is not enough statistical data to draw a direct connection between the two but it is likely most if not all the extra oil production was burned in the kingdom's power plants to meet electricity demand.

Saudi Arabia's power generators rely heavily on burning unrefined crude as well as residual fuel oil and diesel to meet electricity demand.

Combustion of crude, heavy fuel oil and diesel accounted for 68 percent of the fuels used to generate electricity in 2014, according to the Saudi Electricity and Co-Generation Regulatory Authority.

Crude combustion accounted for 44 percent of fuel burned in power plants with heavy fuel oil accounting for another 13 percent and diesel for 11 percent ("Activities and achievements of the authority", ECRA, 2015).

Electricity demand surges during the summer months each year as temperatures rise and air conditioning load on the grid increases.

To help meet the extra fuel demand from power producers, the kingdom usually ramps crude output up during the summer and then cuts production back in the autumn.

In most years, Saudi crude production follows a pronounced seasonal pattern, peaking between June and August before falling again (http://tmsnrt.rs/2b7xcAh).

Crude and refined products are the marginal source of power production, so changes in fuel consumption are closely related to power demand and changes in temperature.

Direct crude combustion averaged 850,000 to 900,000 bpd between June and August 2015 with diesel and fuel oil burning on top of that (Joint Oil Data Initiative, 2016).

Like much of the Middle East, Saudi Arabia has been hit by a heat wave during July which has persisted into early August.

Temperatures have been above normal throughout the kingdom, according to data from the U.S. National Oceanic and Atmospheric Administration (http://tmsnrt.rs/2b7xKGy and http://tmsnrt.rs/2baeKLx).

The implication is that air conditioning load on the grid has been higher than usual, which should increase combustion of crude and refined products.

Saudi sources have reported crude production was 10.55 million barrels per day in June 2016, essentially unchanged from June 2015.

Oil output hit 10.67 million bpd in July, which was around 300,000 bpd higher than in July 2015, an increase of about 3 percent.

Saudi Arabia's combustion of crude and refined products for power production amounts to more than 1 million barrels per day during the summer months.

Given record heat across the kingdom this summer it is likely most of the reported increase in crude production has been burned in the kingdom's power plants rather than marketed for export.

Back in April, Saudi sources told Reuters production "would likely stay at 10.2 million bpd and could rise by some 200,000-300,000 bpd in the hot summer months to around 10.5 million."

The recent increase in crude production appears to be in line with this plan, allowing for some extra crude burn in the record heat ("Saudi to push oil output higher but won't flood the market", Reuters, April 29 ).

Something similar may be occurring in Iraq, where record summer temperatures have also strained the grid to limit.

Like Saudi Arabia, Iraq relies almost entirely on burning gas, crude and refined fuels to generate electricity, so as temperatures rise, power and oil consumption both increase.

Iraq's direct crude burn hit 225,000 bpd in July and August 2015 with additional fuel oil and diesel combustion, according to figures provided to the JODI database.

Iraq's grid has struggled to meet soaring power demand this summer causing widespread power rationing and blackouts ("Iraqis boil as power-grid failings exacerbate heat wave", Wall Street Journal, Aug. 11).

In most countries, when the grid comes under strain, companies and households that can afford it turn to back up generators, which run on diesel, increasing fuel demand even further.

Hot weather is likely to have increased domestic fuel consumption for electricity generation.

In general, the Middle East has experienced slower oil consumption growth in 2015/16 as a result of the economic slowdown stemming from the oil slump ("Middle East economic slowdown will cut oil demand growth", Reuters, Jan. 20 ).

Most economies in the region are barely growing, and some are probably in recession, which limits growth in fuel consumption ("Why is oil market rebalancing taking so long?" Reuters, Aug. 5 ).

But the record heat this summer is likely to provide a short-term boost to oil consumption as power plants across the region crank up.

By John Kemp