Jet Fuel Crisis Looms as Refiners Continue to Prioritize Diesel

Traders complain “there is just not enough jet fuel in the world,” as Russia's war in Ukraine forces refiners to stay focused on diesel. At current premia, refiners should be focusing on jet. But Russian supply fears, and slightly less frantic airline buying after the Easter holidays, means they are still maximizing production of road fuels. “No one buys again until it’s too late,” the trader adds, amid mounting fears of jet fuel shortages this summer. European carriers were already having to tanker in fuel to some destinations in Africa this week.

Crude oil prices were barely changed over the week but jet fuel and diesel prices are still on a sharp upward trajectory. “What the market is losing from Russian supply is offset by what the market is losing in Chinese demand from the Covid lockdowns,” says a crude trading source. He nevertheless warns that while Russian supply is set to decline further, Chinese demand is certainly primed for recovery. International benchmark Brent finished at $108.33 per barrel at Thursday’s close, down 45¢/bbl on the disrupted Easter trading week, while US price pin West Texas Intermediate shed 46¢/bbl to end the week at $103.79/bbl.

Russia’s oil production is down 1.1 million barrels per day compared to prewar levels, but the country's crude exports are holding up so far with far less going to domestic Russian refiners and pipeline operator Transneft selling oil out of storage. The International Energy Agency meanwhile reckons China is currently losing 780,000 b/d from its zero-Covid-19 policy.

Russian diesel exports are set to fall sharply next month as lower domestic refinery runs start to bite and EU sanctions step up a gear. All but “strictly necessary” oil and fuel transactions with majority state-run firms are banned from May 15 under the EU’s fourth round of sanctions. Traders are taking that to mean term volumes will still be allowed, at least until current contracts expire. Onward spot sales by unsanctioned traders may also be permitted but lots of buyers are already requesting non-Russian fuel, despite market discounts of at least $20 per ton, for fear of being accused of funding Putin’s war machine. That thirst for non-Russian diesel is already impacting jet fuel flows to Europe from key suppliers Saudi Arabia and India even before summer airline demand kicks in.

Europe’s benchmark ICE low-sulfur gasoil (LSGO) futures finished the week 7% higher at $1,130/ton Thursday with traders spooked by another drop in Amsterdam-Rotterdam-Antwerp (ARA) gasoil tanks to a new record low of 1.439 million tons, according to Insights Global. ARA jet stocks are also falling but at 897,000 tons on Apr. 21 remain just above levels seen this time last year. Tanks are obviously much lower in terms of days of forward cover, now that airline demand is recovering. Regional departures were up to 82.5% of pre-Covid-19 levels in the 10 days to Apr. 21, according to Eurocontrol, compared to just 36.5% the same time last year.

The week saw one jet cargo deal: China’s Unipec selling 30,000 tons to BP into the UK’s Isle of Grain Apr. 30-May 4 at a $40/ton premium to Platts’ benchmark c.i.f. cargo mean (CCM) in Wednesday’s window. Thursday saw BP bidding for more non-Russian jet into the Isle of Grain at a $100/ton premium to May ICE LSGO futures versus offers from Unipec at May plus $121/ton or CCM plus $30/ton into Rotterdam.

Tightness in US jet fuel markets eased slightly but outright prices remain at record highs of $3.72-$4.60 per gallon due to a 30¢ surge in Nymex diesel futures on the week. The May contract closed at $3.90/gallon on Thursday as diesel prices continue their ascent. Refiners have ramped up jet fuel output to 1.68 million b/d to capture robust jet fuel margins and supply strong demand in domestic and export markets. At downstream utilization rates of 91%, jet fuel yields have climbed to more than 10%. Higher import volumes have replenished depleted tanks on the East Coast, where New York Harbor jet spreads receded from a staggering $4/gallon in early April to 69¢ on Thursday.

Airlines are heading into the peak travel season with jet stocks at precariously lean levels. A 2 million barrel jump in East Coast tanks was partly offset by a 1.5 million bbl drawdown on the Gulf Coast, keeping overall inventories at multiyear lows of 35.4 million bbl. US airline CEOs are confident that record summer bookings will bring air travel close to pre-pandemic levels. Airlines are shifting aircraft to the trans-Atlantic corridor to accommodate the traffic surge to European destinations and offset weak demand in Asia. They expect that higher revenues can offset higher jet fuel costs and yield a profit for the second quarter, after most carriers reported losses in the first quarter. Jet fuel sales in the week ended Apr. 15 fell by 77,000 b/d to 1.52 million b/d as passenger numbers ebbed after the Easter holiday.

Asian jet markets weakened again under pressure from falling prompt demand in China. Benchmark Singapore spot price differentials dropped by 17¢/bbl from Apr. 13 to a premium of $1.64/bbl to Singapore quotes on Apr. 21. Scheduled airline capacity in the giant Northeast Asian market this week dipped by 0.5%, according to aviation data analysis firm OAG. That brought regional airline capacity down by nearly a third compared to a year ago. Widespread lockdowns in China have overwhelmed capacity gains in other markets. Southeast Asia saw a slight 0.3% climb while recovery in India drove a 1.6% gain in South Asia, OAG noted.