Prices Down on Delta Demand Destruction

Oil prices crashed to a three-month low as the rapid spread of the Delta Covid-19 variant sparked more demand-destroying travel restrictions. International benchmark Brent lost $4.86 per barrel to end the week at $66.45/bbl, while US price-pin West Texas Intermediate shed $5.40/bbl to close at $63.69/bbl. Brent dropped as low as $65.57/bbl in intra-day trade Thursday when a strong US dollar also threatened to derail the demand recovery. Crude prices have dropped 12% so far in August, which is shaping up to be the worst month for the petroleum complex in terms of percentage losses since the first lockdown in March 2020. The Opec-plus coalition has gone from producing nowhere near enough oil to fuel the Covid-19 recovery to possibly pumping too much. Global oil demand was originally forecast to grow by 4 million-5 million barrels per day in the second half of 2021, as consumers resumed their pre-pandemic lives, but is now under serious threat. Opec-plus has already agreed to ramp up production by 400,000 b/d a month from August through to at least December, aiming to hold oil prices around the $70/bbl mark. While $65/bbl oil still remains an attractive price, many feel the alliance’s leaders in Saudi Arabia will want to take action to nudge the market back toward $70/bbl. European flight departures have stalled at 70% of pre-pandemic levels this summer, according to network manager Eurocontrol, holding jet fuel consumption at only 50%-55% of 2019 volumes due to the lack of long-haul traffic. Air traffic is set to fall next month when the holiday season ends, with or without any new restrictions to manage the Delta variant. Delta is already rampant across Europe where high vaccination has so far prevented another major spike in Covid-19 deaths. The International Air Transport Association (IATA) agreed this week to recognize both the EU’s Digital Covid Certificate and the UK’s NHS Covid Pass under its own global IATA Travel Pass scheme. IATA is hoping to replicate Europe’s success in restarting regional air travel across national borders on a global scale. There were just two early-week cargo deals in Europe’s price-setting market-on-close trading window, both for prompt delivery before airline fuel demand starts to fall away next month. Swiss trader Vitol bought 30,000 metric tons from China’s Unipec for arrival in Rotterdam Aug. 23-27 at a $23.50 per ton premium to September ICE low-sulfur gasoil last Friday. European supermajor Royal Dutch Shell bought a further 30,000 tons into Rotterdam Aug. 26-Sep. 1 from Unipec at a Platts-related price in Monday’s window. Unipec's LR2 Lyric Camellia coming from Malaysia was named in both deals. Cargo premiums had softened to $22.50/ton over ICE futures by Thursday’s close, down from $25.50/ton a week ago. Jet fuel tanks in Amsterdam-Rotterdam-Antwerp held above 1 million tons for the 13th week in a row, according to Insights Global, with higher local refinery production offsetting a lull in imports. US jet fuel sales are still rising, hitting a new post-pandemic high in the week to Aug. 13, according to the latest weekly figures from the Energy Information Administration. Sales were up 31% on the week to 1.67 million b/d with the spread of the Delta Covid-19 variant yet to dampen demand for domestic travel by enough to hit flight schedules and airline fuel uplift. The strength in jet comes as US demand for gasoline slows for a second week in a row. US jet fuel stocks are still building courtesy of bumper domestic refinery production and higher net-imports which have fueled large stockbuilds on both the US Gulf and West Coasts. Tanks rose by 94,000 barrels nationwide to 43 million bbl last week. US jet markets continue to outperform those elsewhere, keeping a lid on exports even as US refiners ramp up production beyond domestic requirements. Prices fell in all markets but particularly in Los Angeles following an influx of imports from Asia. Traders are wary that lifeline supply of fuel could be cut if Delta demand destruction prompts Asian refiners to cut runs. Despite recent builds US West Coast jet inventories are still well below 2020 levels. The region has lost a significant amount of refining capacity since 2019 amid an accelerating energy transition, while logistical issues prevent it from being supplied with jet from other US regions. Asian jet fuel differentials continued their upward climb, spurred on by heavy buying in the price-setting Singapore trading window and an uptick in regional air traffic volumes. Norwegian oil market analyst Rystad noted that Asia's jet fuel demand fell below Europe's for the first time in more than a decade this month after the Delta Covid-19 variant sparked new restrictions on air travel in China. It pegged regional buying at just 1 million b/d in mid-August compared to a recent peak of 1.04 million b/d in Europe. “[China] is now almost back to the lows of the pandemic’s first wave," said Rystad analyst Simen Eliassen. Asian demand is soon expected to outpace European again with the market already getting a boost from surging Southeast Asian air traffic last week. The region's scheduled airline capacity spiked 37.6% in the week of Aug. 16, according to aviation data analysis firm OAG, offsetting 0.6% and 0.7% declines in Northeast Asian and South Asian capacity. Benchmark Singapore spot cargoes were pegged at a 5¢/bbl premium to the mean of Platts Singapore quotes by Thursday's close, up from a 4c/bbl discount last week. Some 432,000 bbl of end August to early September-loading jet changed hands in the window between Aug. 13-19 with European major BP on the buy-side of all of it. BP bought 100,000 bbl each from US major Chevron and China's PetroChina and Unipec, plus a further 132,000 bbl from European heavyweight Shell. The deals take BP's Singapore window purchases to almost 1 million bbl of jet so far this month. The East-West flow of jet dipped to just 258,000 tons in the week starting Aug.16, according to data intelligence company Kpler, down 66,000 tons from the previous week. European Quarterly Jet Fuel Swaps Quotes (Bid/Offer Range in $/ton, c.i.f. NWE) Quarter Chg. Aug 20 Aug 13 Q4'21 -46.50 563.00 - 564.00 609.50 - 610.50 Q1'22 -44.00 562.00 - 563.00 606.00 - 607.00 Q2'22 -42.00 563.75 - 564.75 605.75 - 606.75 Q3'22 -39.25 567.00 - 568.50 606.50 - 607.50 Prices are live for midday. Source: FCStone