State-run Bahrain Petroleum Co (Bapco) has started negotiations for its 2013 term contract for gasoil and jet fuel, with price levels for gasoil much higher than this year, said industry sources.

Bapco's term contract for the oil products is significant as it is the first from a Gulf producer and is likely to set the tone for other term contracts in the region.

It is also the first time the contracts will be priced off a new benchmark gasoil grade, which will provide a direction for pricing of contracts for the new benchmark next year, traders said.

Bapco is asking for a premium of about $3.25 a barrel above the new benchmark, gasoil with 500 parts per million (ppm), for its gasoil cargoes and about $2.30 a barrel above Middle East jet fuel quotes for its jet fuel cargoes, traders said.

But buyers are standing firm, with premiums of about $2.00 to $2.50 a barrel for the gasoil cargoes and lower levels for the jet fuel cargoes, they said.

The term contracts are expected to be awarded later this week, they added.

Buyers were surprised at the higher than expected gasoil premium offered by Bapco, given that more supply is expected in the Gulf when the new 400,000 barrels-per-day( bpd) Saudi Aramco Total Refinery and Petrochemicals Co starts operation next year.

"There's quite a bit of resistance from term lifters to agree on the number," one of the sources said. "Most companies want to conclude at around $2 a barrel premium."

Bapco set its 2012 term prices for gasoil at a premium of $3 a barrel above the current benchmark of 0.5 percent sulphur gasoil and a premium of $1.75 a barrel for jet fuel.

Current term buyers include Trafigura, Vitol, Addax Petroleum, Independent Petroleum Group, Galana Oil, BB Energy, Shell and BP, a trader said, though this could not be verified.

From next year, price agency Platts, a unit of McGraw-Hill , is lowering to 500 ppm from 5,000 ppm the sulphur specification of its benchmark gasoil assessment in Singapore and the Middle East.

The move towards a lower sulphur gasoil grade is aimed at keeping up with global changes, especially in regions like Europe which have adopted the Euro V fuel specifications, the company has said.

Demand for gasoil, used as a fuel for power generation in the Gulf, and for jet fuel has been increasing from Africa and Saudi Arabia on the back of better industrial growth that has driven up premiums for the oil products, traders said.

Also in the Gulf, Kuwait Petroleum Corp (KPC) is expected to start negotiations for its gasoil and jet fuel term contracts later this week.-Reuters