India has cancelled term 1.0 per cent and 0.25 per cent sulphur gas oil contracts with middle east refiners Kuwait Petroleum Corp (KPC), Bahrain National Oil Co (Banaco) and Abu Dhabi National Oil Co (ADNOC), Indian officials said.

Traders estimated the move would put at least 4,00,000 tonnes per month more of 1.0 per cent gas oil supplies into the open market. This has sparked premium-slashing for 1.0 per cent sulphur spot gas oil to 20 cents per barrel for March lifting cargoes, down from a peak at 90 cents in February.

"One per cent gas oil is going to get very, very long and we are going to be working hard to get homes for it," a Dubai-based trader said.

Many Middle East refiners were geared towards production of higher 1.0 per cent sulphur gas oil to supply India, a key buyer, taking on average at least 6,00,000 tonnes per monthlast year.

But from April, Indian oil ministry officials said they would buy only 0.25 per cent sulphur diesel, to prepare for phasing in the greener diesel from 2000 in domestic market.

The only willing buyers of 0.5 to 1.0 per cent gas oil were now traders able to move cargoes long haul to Latin America or South to Africa. Other Asian key buyers, Indonesia and China, did not lend support.

Traders said they would have to get more "creative" to secure limited outlets. They said India's decision could be a boon for refiners in Taiwan, Thailand, Singapore or South Korea who can produce the grade but would be "horrible" for the traditional suppliers.

Middle East refiners had limited low sulphur gas oil production capabilities and were seen scurrying for homes for higher sulphur gas oil sales this week. The Gulf's largest spot gas oil seller refiner KPC had sold cargoes to Indonesia and was negotiating to sell two spot gas oil sales this week at a premium of around 15 to 25 cents per barrel, a companysource said.

The Gulf's largest gas oil term seller Saudi Aramco will also face selling pressure, although less, as more than half its cargoes have already been termed at a 50 cent per barrel premium in 1999 to several western traders.

A third refiner Banaco would face the largest problems as they could not produce the required Indian grade until at least May, when refinery configurations were changed.