Once it hits full stride by the second quarter, when it is expected to begin exporting fuel to capitalise on an Indian fiscal-year tax break, it will add an enormous 8 million tonnes of gasoline and 12 million tonnes of diesel to the market every year, upsetting current supply flows, traders say.Because of its location on India's West Coast, it is in prime position to meet any unsatisfied demand that emerges from the mainstay European market or even the Middle East and Africa, where demand could continue to expand even as a global recession restricts demand in the rest of the world.

"When both its refineries are running... it looks likely that Reliance will offset or replace North Asian diesel barrels going West," said a Singapore-based trader.Already besieged by a demand slump on fears of a deep recession, that lost market has forced refiners such as top exporters Formosa Petrochemical Corp in Taiwan and SK Energy, South Korea's biggest refiner, to sell at more competitive prices or even to cut runs in future.

And trading firms such as Vitol or Trafigura, which make much of their living on arbitrage, would need to overhaul their trading strategies to fit in Reliance's additional supplies through term contracts, for example.

ARBITRAGE UNDER THREAT

The private Indian refiner, which commissioned the $6 billion plant last Thursday, may start large-scale exports only from April.Having established a global trading network from Singapore to London to Houston, Reliance will be able to quickly reach the most profitable market for its ultra high-quality fuels, but distance and marketing networks will also be important.

Oil traders expect Reliance to export its gasoline mainly to Africa and the fast-growing Middle East -- because of freight rate advantages -- as opposed to United States, while low-sulphur diesel will be shipped mainly to Europe and the Mediterranean, where diesel is the preferred motor fuel.

Iran needs at least 450,000 tonnes of gasoline a month to plug its product gaps, while Singapore had moved about 45,000 tonnes of the auto fuel to the United Arab Emirates (UAE) earlier this month, a timely relief for sellers which faced a tightly shut Asia-U.S. arbitrage window.

"The new refinery will definitely make it tough for sellers. Reliance will have to export one medium-range gasoline cargo a day when it's at 100 percent capacity," said a Northeast Asian trader.It can also ship out daily an MR cargo of diesel from the new plant, equivalent to 30,000 tonnes in volume, traders said.

Reliance has already sold up to seven cargoes of 0.005 percent sulphur diesel to trader Vitol, and secured term deals to supply up to a total of 26 cargoes of 0.05 percent sulphur diesel to Trafigura, Kuwait's International Petroleum Group and Dubai-based trader Galana.

The supplies are a mix of 40,000-tonne, 60,000-tonne and 80,000-tonne shipments.Formosa and SK Energy together export around 300,000 tonnes of gasoline and some 700,000 tonnes of diesel a month in spot and term deals, some shipments of which are usually bound for markets that will now be targeted by Reliance.

The East-West gas oil arbitrage window last swung open in late-November, with at least 300,000 tonnes of diesel seen moving from Asia to Europe, traders said.

Back then, the East/West spread -- a measure of arbitrage economics with a wider spread indicating higher profitability -- was at discounts of up to $40 a tonne for the front month.At discounts narrower than $10 a tonne now, the arbitrage window is firmly shut, traders said.

Other exporting plants include the large facilities in Japan and those in Singapore run by ExxonMobil and Royal Dutch Shell, although the two retain an advantage serving the Australian market.

TOUGH AT HOME

Given its targeted markets on gasoline, some traders are hoping Reliance will not try to sell directly into the U.S. West Coast, leaving traders to handle the Asia-U.S. arbitrage.

But with global oil demand contracting this year for the first time in a quarter century, Reliance may find itself competing on Asian refiners' home turf in the one region that economists are counting on to maintain some growth.

"If the regions (that Reliance is eyeing) fail to absorb the products, then you will see them coming to the East," said another trader.Yet, the Asian spot market may not be welcoming.

Economic slowdown has hit demand in the region's top motor fuel importers Indonesia and Vietnam, the latter of which will fire up its first oil refinery come February, relieving the country of 30 percent of its domestic needs.

China, the world's number two oil consumer, saw oil demand retreat for the first time in three years in November and has more or less halted any motor fuel imports after a surge in pre-Olympic demand in the first half of the year.