Jet fuel prices in the U.S., Europe and Asia have become a victim of their own success as 2018 reaches its midpoint – at least as far as market bulls are concerned.
Previous robust demand gave a boost to jet fuel supply in 2017. Refiners had been scrambling to produce more aviation fuel during the latter half of last year.
But balances have shifted. The prior supply increase has been met by a trend toward slower demand. Now, jet fuel prices are set to fall through September, according to market watchers.
First Off, Why Does Jet Fuel Matter to Me?
If you are drifting away from this blog post and, instead, pondering your upcoming summer vacation, let us stop you right there and explain why jet fuel prices matter – even if you don’t trade jet.
Bottom line: When jet fuel costs climb, airlines tend to raise their ticket prices. The price of jet fuel can really have an impact on your - and everyone else's - vacation souvenir budget. So, even if you aren’t a jet fuel trader, it’s important to keep an eye on where aviation fuel prices are headed.
And because jet fuel is a commodity that is exported globally, price volatility in Europe has widespread ramifications on jet fuel prices in other parts of the world.
OK, Back to the Current Jet Fuel Market
Look at these latest supply stats from Energy Aspects:
- Global jet/kerosene supplies grew by 200,000 b/d year on year in March, mainly in Asia and the U.S.
- U.S. supplies grew by 110,000 b/d year on year in March and are forecast to grow in April and May by 42,000 b/d and 85,000 b/d year on year, respectively, according to Energy Aspects.
- Combined inventories of jet and kerosene in the U.S., Europe and Asia (China, Japan and South Korea) fell by 900,00 bbl month on month in March, said the consultancy. That's compared to a 3.7-million-bbl draw in March 2017 and a five-year average draw of 1.3 million bbl for the month.
- U.S. jet stocks remained lower year-on-year in early June but are likely to start rising above the five-year average.
“Jet markets have weakened considerably over the past month as supply has risen worldwide after a protracted period of strength in Q1 2018 triggered a global supply response,” said analysts at Energy Aspects. “Our balances soften in line with the usual seasonal trends through September before tightening in Q4.”
But, what about demand?
"Supply growth continued to outpace demand growth in March, mainly due to Asia,” said Energy Aspects in its Outlook: Middle Distillates report for June. "Global jet/kero demand grew by 120,000 b/d year on year in March, which pegs Q1 2018 demand growth at 150,000 b/d, much lower than recent trends."
Crude Oil Prices are a Factor
This spring, crude futures soared to their highest prices in years, amid the United States reimposing sanctions against Iran and a fall in production from OPEC and other key oil producing nations following an agreement that was ratified at the end of 2016.
But those highs were not sustained. Front-month Brent crude futures smashed through the $80/bbl marker mid-May, but then fell below the mid-$70s/bbl marker following reports that Russian and Saudi officials were considering rolling back the agreed output cuts.
How does this impact jet fuel? Jet is priced at a premium to low-sulfur gasoil futures in Europe. What happens to gasoil futures when crude jumps? They hit multiyear highs also. And when crude recedes, so do low-sulfur gasoil and jet fuel.
Let’s Dive Deeper Into Jet Fuel’s Unique Price Dynamics
Spring maintenance season is a time when refiners take their plants down to make repairs and upgrades – and typically make less fuel.
Europe’s reliance on Arabian Gulf/West Coast India/Far East supply against the backdrop of maintenance season set the stage for strong jet fuel pricing in Europe in Q1 earlier this year. That’s part of the reason why refiners elsewhere started churning out so much supply. U.S. jet yields hit record levels in April and May this year, according to Energy Aspects.
Jet fuel consumption typically peaks across July-August, as the number of flights, long-haul journeys and passenger headcount all surge due to summer holiday demand. That could eat into the currently inflated supply.
But for now it seems the most recent price spike is behind us. Outright prices for CIF jet fuel cargoes hit a year-to-date high of $757.75/ton on May 17, OPIS jet fuel data show. That's also the highest since Nov. 26, 2014, as the oil complex was buoyed by Brent crude's push through the $80/bbl marker.
Since then, though, CIF and FOB diffs have dropped between $10/ton and $15/ton. Outright jet CIF cargo prices have dropped more than $40/ton in Europe by end-June, according to OPIS data.
As we noted above, this is a worldwide export market. An armada of jet fuel tankers is on the water for European arrival in July, with cargoes of aviation fuel tracked arriving in the region currently totaling over 2 million tons, the highest monthly arrival volume in Europe this year, according to OPIS Tanker Tracker data.
Of course, as more fuel comes over, demand for vessels increases, pushing up freight costs, much to the delight of shipowners and their brokers. By the end of the first week of June, charterers were paying lump sums of up to $2 million to book LR2 tankers to ship 90,000 tons of jet fuel into Europe. That's the highest rate since the week ending March 30, according to data from London-based shipbroker Clarksons.
Increased imports have meant that stocks of jet fuel held in independent tank farms in the Amsterdam-Rotterdam-Antwerp storage and refining hub increased by almost 7% to 637,000 tons in the week to June 1, according to data from consultancy PJK International. Overall European stocks were close to the five-year average by the end of March, but jet stocks built for six consecutive weeks to reach a 2018-high by early June.
What About the Direction of Jet Fuel Prices in Q4?
Despite the near-term bearish outlook, airlines are still bracing themselves for an upswing in jet fuel prices later this year. Scandinavian airline company SAS Group said, while announcing its Q2 results in early June, that it has adjusted its hedging strategy, expecting higher fuel costs in the second half of the year.
Energy Aspects acknowledges the seasonal stock builds, but suggests that the market has a ways to go before it can rest on its laurels, safe in the knowledge that supplies are sufficient:
"Global jet inventories are fast approaching the five-year average and are the tightest since 2008 when normalised to demand," said Energy Aspects last month. "Summer should see seasonal stockbuilds, but if they come in lower than expected, jet is likely to rebound in Q4.”
The OPIS Worldwide Jet Fuel Report gives you a comprehensive daily breakdown of global spot jet fuel prices, reflecting an industry-driven, full-day price methodology. Plus, get the news and analysis you need to give context to the volatile market.