US jet fuel soared in Q3 on sagging RVO, record demand

The summer months always constitute the peak travel season for US airlines, making the third quarter traditionally the heaviest sustained demand portion of the year.

But Q3 2018 was something the industry had never seen.

Record demand for jet fuel in both the US and Latin America, combined with sagging Renewable Volume Obligation (RVO) values, led to unprecedented strength in prices during Q3.

US jet fuel demand reached an all-time high this summer.

Seven percent airline year-on-year growth on average across the US," said a Gulf Coast jet fuel trader.

Added to the domestic strength, Q3 demand for jet exports to Latin American demand also reached record highs. Latin America takes around 50% of US jet exports, and Mexico is the region's top importer. Jet fuel imports now cover around 63% of Mexico's domestic demand, compared with 53% in 2017, 44% in 2016 and 33% in 2015.

In July 2018, USGC jet exports averaged 236,625 b/d, up from 164,888 b/d over the same month in 2017 and 146,665 b/d in 2016, according to US Energy Information Administration data. Mexico led the way in July with 1.45 million barrels imported from the US, followed by Brazil at 932,000 barrels.

US refiners were forced to run maximum jet fuel output to try to keep up with all the demand, setting new records for all-time jet output five times this summer, EIA data showed.

Still, demand outpaced the record production and prices took off.

S&P Global Platts assessed benchmark USGC jet fuel on Colonial Pipeline at an average of $2.1843/gal in Q3 2018. That was significant jump from Q3 2017's average of $1.6353/gal and 2016's Q3 average of $1.3410/gal.

Q3 jet fuel prices were so strong that USGC jet, traditionally at a discount to USGC ultra-low sulfur diesel, flipped to a premium to its distillate neighbor in early July. It held that premium to ULSD for 31 of the next 35 days.

Plunging costs for RVO compliance also played a role in jet fuel's Q3 strength.

The renewable volume obligation -- a calculated value based on Renewable Identification Number prices and EPA-published mandates -- dropped to multiyear lows during the quarter.

Lower RVO values incentivize refiners to produce more ULSD, since their compliance cost is lower. If they are making more ULSD, they are necessarily making comparatively less jet fuel. Thus, jet supply is tighter, supporting prices.

On the Atlantic Coast, tight supply due to intermittent problems at key Northeast refineries, as well as lower shipping volumes coming up Colonial Pipeline, kept regional jet prices high during the quarter.

Platts assessed benchmark jet fuel on Buckeye Pipeline in New York Harbor at an average of $2.1862/gal during Q3 2018, compared to $1.6605/gal during Q3 2017.

In the US Midwest region, Q3 was relatively subdued. Chicago jet traders are wary of jet fuel thermal oxidation testing, or JFTOT. From time to time, jet barrels arrive in the Chicago area and fail this test, requiring 5-10 days of treatment before being released onto the various pipelines in and around the city. This can cause Midwest prices to spike suddenly.

However, the Chicago area pipelines seem to have gotten this situation under control, keeping wild price fluctuations seen in past years to a minimum in Q3.

The US West Coast jet fuel market is balanced by imports coming over from South Korea and Japan, sources say. If any of the volatile USWC refineries is having trouble, incoming Asian jet cargoes can fill in with supply and mitigate price movement.

However, if the flow slows down due to a closed arbitrage and barrels staying in Asia to meet demand there, USWC jet prices can rise dramatically.

An example of this happened in April, when the Los Angeles jet fuel differential reached a three-year high after the longest stretch without an Asian jet cargo since February 2016.

The Asian jet flow did indeed slow in Q3, continuing a trend seen throughout 2018. There were 21 jet cargoes into California between July and the end of September, delivering 4.91 million barrels of jet fuel. That was quite a drop from Q3 2017, which saw 39 cargo vessels delivering 7.54 million barrels of jet.

US airlines absorbed the impact of higher Q3 jet fuel prices and responded immediately. Underperforming routes were either cut entirely, or had their frequency curtailed. Industry analysts said jet fuel went from just under 20% of airline expenses before summer 2018 to as much as 25% in some cases.