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Jet Fuel Markets Dislocate From Crude

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Transportation, Commercial Airplanes 9826612-commercial-airplanes-b

Jet fuel demand is on its own trajectory, with aviation's post-pandemic recovery gaining pace just as economic fears drive the rest of the oil complex lower. Demand worries took over from geopolitical and supply chain tensions to knock crude oil prices back slightly this week. "Soaring [fuel] prices and slowing economic growth are expected to significantly curb the demand recovery through the remainder of the year and into 2023," the International Energy Agency (IEA) said Thursday in its monthly Oil Market Report. International benchmark Brent lost $3.45 per barrel to finish at $107.45/bbl Thursday while US domestic price pin WTI shed $2.13/bbl to close at $106.18/bbl. Opec also cut its demand forecast for the second month in a row. The US headline consumer price index for the 12 months to April was up by 8.3%, fueling concerns about bigger interest rate hikes and their impact on economic growth.

But bullish drivers still remain. Oil prices spiked on Wednesday after Russia imposed some more tit-for-tat sanctions. An EU embargo on Russian crude and oil products is still possible by the end of this year despite Hungary’s threat to use its veto. Brussels could offer Hungary until the end of 2023 to wean itself off piped Russian crude in a bid to get its sixth package of sanctions against Russia signed off at the end of this month. Russia's oil production has risen so far this month, reversing a near 1 million barrel per day decline in April, but the uptick is expected to be short-lived. International traders Vitol and Trafigura have both indicated that they will handle less Russian crude this month when earlier EU financial restrictions take effect. Most Russian oil is still staying in Europe although India has ramped up discounted Urals crude purchases in order to send more diesel back to Europe.

Europe’s jet traders now fear a torrid summer with “low stocks, low [Rhine] water levels [and] limited oil on the water” all making it difficult for them to service the rapid recovery in regional airline fuel demand. Regional air traffic was back to 85.5% of pre-pandemic levels this week, according to network manager Eurocontrol, with fuel uplift now showing a similar recovery. Imports may be picking up but remain insufficient. About 1.1 million metric tons of jet are now expected to land in May and 750,000 tons already booked for June. East of Suez refiners should be switching back to jet from diesel but aren’t. One trader suggests that many have locked in diesel supply commitments they now need to meet, whatever happens to jet prices. Traders fear any refinery recalibration would come too late for this summer season, although they still don’t think it will get the point where flights are canceled due to a lack of fuel. “No one will ever know there isn’t enough fuel if [the planes] don’t fly,” says a trader referring to widespread staffing shortages at both airlines and airports in Europe.

Jet tanks in Amsterdam-Rotterdam-Antwerp fell again this week and now stand at their lowest level in two years at just 784,000 tons on May 12, according to stock monitor Insights Global. The week saw three cargo deals at escalating prices. Swiss trader Vitol sold 30,000 tons to European major BP into the UK’s Isle of Grain Jun. 1-5 at a $47 per ton premium to the Platts c.i.f. cargo mean (CCM) in Wednesday’s window, nominating the LR2 Jo Pinari en route from the United Arab Emirates. Swiss trader Glencore sold two parcels last Friday: one to BP into Le Havre May 22-26 at CCM plus $73/ton and the other to Shell into the UK’s Shellhaven at a $195/ton premium to outgoing May ICE low-sulfur gasoil futures for May 16-20 delivery.

Tightness in US jet fuel supplies eased as refiners lifted output to more than 1.7 million b/d in the week ended May 6 to capture strong jet fuel margins. Gulf Coast crack spreads receded slightly to $73/bbl last week after topping $90 in late April. Gasoline crack spreads are nearly $40 below jet fuel and diesel, giving refiners little incentive to prepare for the summer driving season. Jet demand has stabilized around the 1.4 million b/d mark and is poised for strong gains with the shift to summer flight schedules. Trade flows ebbed from their recent surge, with imports falling to 124,000 b/d and exports off by nearly two-thirds to 124,000 b/d. The East Coast market is stretched to the limit and prone to shortages this summer as lower deliveries up the Colonial Pipeline into New York Harbor keep cash prices there at $6.60 per gallon.

US prices are the highest in the world at average outright levels of $4.38/gallon. But stiff competition for scarce cargoes to replace Russian volumes is drawing cargoes to Europe. Massive swings in differentials have seen New York Harbor spreads rise to $2.67/gallon over June diesel futures, up from $1.10 in early May. Los Angeles differentials plummeted to 10¢/gallon below the June print, down from a 37¢ premium in the same period. Gulf Coast spreads sank to a 2¢/gallon premium on Thursday after hovering at average rates of 15¢ above futures for several weeks. A long, hot summer is in store for airlines refueling at US airports as high prices add to cost pressures at the same time that supply shortages and logistical constraints threaten their operations.

Asian jet markets strengthened amid a surge in Chinese prompt demand. The Singapore price differential soared to a premium of $5.68/bbl to Singapore quotes on May 10, its strongest level in five weeks, before settling down to $3.74/bbl on May 12. That still represents a leap of $1.11/bbl from last week. A total of 165,000 bbl of late May loading jet traded from May 6-12 in the Singapore Platts trading window. Vitol sold all the volumes in one lot on May 6 at a hefty premium of $5.40/bbl to Singapore quotes pricing in the second half of May. Scheduled airline capacity for the week of May 9 spiked by 14% in Northeast Asia due to a 23% surge in China, according to data analysis firm OAG. That strong gain coincided with relatively steady capacity in South Asia and a slight dip in Southeast Asia, OAG noted.

European Quarterly Jet Fuel Swaps Quotes
(Bid/Offer Range in $/ton, c.i.f. NWE)
QuarterChg.May 13May 6
Q3'22-17.501,122.50 - 1,123.501,140.00 - 1,141.00
Q4'226.501,050.00 - 1,051.001,043.50 - 1,044.50
Q1'23-3.50987.50 - 988.50991.00 - 992.00
Q2'23-2.75947.50 - 948.50950.25 - 951.25

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