Ramzi, after about 40 minutes of exercise - glycogen stores are depleted and then the body uses free fatty acids (FFA). Here is a link of interest from University of Michigan Board of Regents and MedFitness Group (Copyright 2005-2009).

http://umich.edu/~medfit/resistancetraining/timingiseverything101705.html

Thank you for the contribution. But my question is basically whether the fat used comes from the nearest location to the working muscle groups or from all over the body. 

This research seems to suggest that it does not come locally. "A significant (p < 0.05) decrease in fat mass was observed in the upper extremities and trunk..." when the subjects were using a leg press for exercise. 

Regional fat changes induced by localized muscle endurance resistance training.

J Strength Cond Res. 2013 Aug;27(8):2219-24. doi: 10.1519/JSC.0b013e31827e8681.

https://www.ncbi.nlm.nih.gov/pubmed/23222084

This is an interesting question. We know from biopsies and in vivo MRS studies that muscle cells accumulate lipid droplets (intamyocellualr lipid -IMCL). These are the first source of lipid fuel for muscle cells. There was much interest on IMCl a few year ago due to their relationship with insulin resistance, leading to what was also known as the "athletes paradox". It has now been shown that IMCL is not directly responsible for the insulin resistance effect, but rather some intracellular metabolites (see Shulman's work). So, the first source of fuel are IMCL, then circulating TG,. The sources of the latter still not unclear but not necessarily from muscle fat  

 Thank you all. I think Thom has provided a very helpful study for this question. 

I think there are lots of caveats to consider. First, what type of 'exercise' do you mean---resistance training vs cardio and at what intensity for either? All are likely to exhibit different effects as different hormones are stimulated and different muscle fiber types recruited. I think it has been established that certain areas are more fat-loss resistant--mainly the gluteal/hip/thigh region has less mobile fat stores than do the abdominal/trunk area--and this is do to different levels of enzymes, different amounts of circulation to the area and perhaps different properties of fat stored in the areas. I saw, anecdotally, in a study I did that there were significant changes in fat mass in the waist area and subjects reported less 'cellulite' in their thighs. The regimen including no real 'core' work in terms of ab exercises, just very difficult upper and lower body strength training moves with machines (only 8 exercises). Our DEXA measurement did not reflect any significant changes but I think that if we had had MRI measurements we would have seen captured spot-reduction. On the other hand, the famous Jack Wilmore situp study found no different in fat mass measures in the belly from doing up to 600 sit-ups per day for one month. Other studies have shown with waking and other cardio exercise including Dr. Bell's above sign. reductions in visceral fat mass after 6m of training aerobically with no 'ab' exercise included.

You burn intramuscular fat droplets when you doing abs exercises for a long time. this is NOT abdominal fats. The IMFD can be restored by fat from the abdominal tissue. This would increase a bit the fat oxidation capacity of the abdominals muscle.

However cardio would have a higher fat burning and contribute more to fat oxidation from the adipose tissue (of course the oxidation is most in the skeletal muscle). So better do cardio than long periods of abs exercises.

So sit-ups will increase the fat oxidation inside the abdominal muscles. but to loose abdominal FAT you can better do cardio. To some extend a cardio format in which the abdominals are used might be preffered. For instance running comparred to biking.