Jet Supply Fears as Russian Diesel Disappears

Europe’s traders are braced for much-tighter middle distillate markets next month after Russia cut back on its ultra-low-sulfur diesel (ULSD) exports. Only 1.1 million metric tons of ULSD is due to load from Russia’s main Baltic port of Primorsk in May, down nearly a third on the 1.56 million tons scheduled this month. The slump comes as sanctions hit Russia's refining industry and ahead of EU plans to tighten the rules around buying Russian oil and products from May 15. A full-blown embargo is still possible after Germany dropped its opposition. Europe needs imports to meet more than a fifth of its giant diesel demand with at least half of that shortfall previously met by Russia.

Looming diesel supply problems are seriously bad news for airlines, with refiners now far less likely to increase jet fuel production in time for the summer. Key export refiners in the Middle East and Asia have been stuck in maximum-diesel mode for two years now with many of them building up term customers for ULSD in that time. India and Saudi Arabia in particular have been quick to boost ULSD sales to Europe as the region scrambles for alternatives to Russia. Jet traders fear a major supply crunch as the aviation industry finally recovers from its Covid-19 paralysis.

ICE Brent crude futures dipped on the week but the exchange's low-sulfur gasoil (LSGO) contract gained 7%. Flat ULSD prices, including the spot market, were trumped only by a 10% jump in outright European jet fuel prices. International benchmark Brent fell 74¢ per barrel to close at $107.59/bbl Thursday while US price-pin West Texas Intermediate gained $1.57/bbl to finish at $105.36/bbl.

Shell made headlines in Europe after it closed a contract loophole that allowed it to buy less than 50% blended Russian fuel and still claim to be self-sanctioning. The European supermajor put the new restrictions on two jet fuel cargo bids posted in S&P Platts’ market-on-close window for the first time Apr. 27 then added it to a ULSD bid on Apr. 28. Rival BP has also tightened its contract terms to make it even clearer that it won’t take any Russian molecules, including components, following a dramatic increase in fuel blending around Amsterdam-Rotterdam-Antwerp. Weekly data from Insights Global showed a second Russian Novatek jet tanker, thought to be the MR Idi, discharging into Rotterdam tanks this week. Russian jet exports from Ust-Luga were previously placed in the local Scandinavian market. Jet tanks still fell to a seven-week low of 850,000 tons on Apr. 28, according to Insights Global.

The week saw just one public cargo deal, China’s Unipec selling 30,000 tons to BP into the UK’s Thames-Oikos terminal May 5-9 at a $131 per ton premium to May ICE LSGO futures in Monday’s window. BP was bidding for Thames-Oikos at only May plus $117/ton in Thursday’s window as well as May plus $152/ton for May 10-14 delivery into Amsterdam and May plus $166/ton for May 8-12 arrival into the UK’s Isle of Grain. All bids had the tougher restrictions against Russian fuel. Shell bid for non-Russian jet at May plus $164/ton for the UK’s Shellhaven and Platts-related into Le Havre, leaving only China’s Unipec publicly willing to accept Russian fuel into Rotterdam but not the UK. Swiss trader Glencore was present on the offer side earlier in the week with the LR2 STI Grace carrying jet from the United Arab Emirates and the STI Oxford bringing fuel from Kuwait. Network manager Eurocontrol flagged a recovery in European air traffic to 82% of pre-Covid-19 levels over Easter including a return to 93% of 2019 levels on the fuel-hungry north Atlantic route. Traffic to Asia-Pacific is still down by 41%.

Expiry of the prompt diesel futures contract unleashed mayhem in the US middle distillate complex, sending jet and diesel into the stratosphere. The May Nymex ULSD contract jumped by $1.20/gallon in just four trading days, reaching $5.13 on Thursday. West Coast jet differentials readjusted to the much-lower June contract. Spreads in Los Angeles spiked to a 36¢/gallon premium from a 19¢ discount last week. NY Harbor spreads still linked to May values plummeted to a 9¢ premium to offset some of diesel’s gain, down from average rates of 75¢ last week. Markets are especially tight on the East and West coasts. Shipments through the Colonial pipeline are not allocated in the run-up to the gasoline season, largely because Gulf Coast product is leaving the country as exports to Latin America and elsewhere.

Higher jet demand and tight supplies are setting the stage for potential shortages this summer. Jet sales climbed by 77,000 barrels per day to 1.59 million b/d in the week ended Apr. 22 and are on track to reach 2019 levels of 1.85 million b/d this year. Refiners increased output slightly to 1.67 million b/d as they prioritize mid-distillates to capture soaring margins. Jet fuel stocks are relatively low at 35.8 million barrels or 6% below year-ago levels. The East coast has no cushion with regional tanks losing more volume to settle at 7.8 million bbl — 25% below year-ago rates when demand was much lower. But US diesel stocks have a 23% a deficit versus 2021 at a time when refiners need to ramp up gasoline to meet summer demand.

Weaker Asian jet markets bucked the global trend despite the air traffic resurgence in the region. Benchmark Singapore spot price differentials at one point dropped to their lowest level in more than two months. After sinking to a premium of $1.13/bbl to Singapore quotes on Apr. 25, the differential recovered to $1.37 on Apr. 28 — a decline of 27¢/bbl from a week ago. Lower Asian prices have widened the huge arbitrage window for shipping jet cargoes across the Pacific to the overheated US West Coast market.

A rebound in scheduled airline capacity in Asia’s two largest regional aviation markets easily offset a dip in South Asia. Capacity for the week of Apr. 25 spiked by 11% in Northeast Asia, the world’s third-largest regional aviation market, according to aviation data analysis firm OAG. A 12.5% surge in China propelled the gain. While China has resumed its recovery, full capacity may not be reached until the end of June. OAG noted that Chinese domestic capacity had been slashed by half after the lockdown in Shanghai kept 26 million people at home. Scheduled airline capacity jumped by 8% in Southeast Asia but dipped by 0.8% in South Asia.