Despite falling demand, European jet fuel cash diffs surge to 3-year highs

Between staff shortages and fresh travel restrictions, the omicron variant has led to significant cuts in airlines' Q1 2022 schedules, yet cash differentials for European jet fuel cargoes and barges have both risen to pre-pandemic levels at the start of January.

CIF NWE jet fuel cargoes were assessed at a $68.50/mt premium over the front-month ICE low-sulfur gasoil future Jan. 12, the highest physical premium for NWE jet fuel cargoes since March 6, 2018, S&P Global Platts data shows.

The increase came as flat prices for CIF NWE jet cargoes jumped $16.25/mt on the day to a seven-year high of $804.75/mt, amid a rising oil complex.

The situation has also driven the barge market higher, with FOB FARAG jet barges firming to a $60.25/mt premium over the front-month ICE LSGO futures on Jan. 10, the highest premium since April 30, 2018, Platts data shows. Since then barges softened to $57/mt over the front-month ICE LSGO future on Jan. 12.

The surge higher comes despite global weekly scheduled airline seat capacity dropping 7.2% on the week for the week starting Jan. 10, as a heavy fall in European seat capacity was compounded by a drop in North America and South Asia capacity, according to aviation data company OAG.

In Western Europe, weekly seat capacity slumped by 23.5% on the week, putting it at 59.6% of Jan. 6, 2020 level, down from around 78% versus 2020 levels the week prior.

"Demand is low, but stocks are the driver at the moment... it's not easy to explain given the demand picture. I believe refiners must not be running as good as they should be," said one trader.

"There is so much volatility as there is no buffer because of low stocks," another trader said, adding that there were no jet fuel cargoes left for January in NWE. "They are all sold, if you really, absolutely need something you have to pay CIF plus teens... There is just a lack of cargoes as arb [from East] was closed from end of December and US attracted barrels," he added.

As of Jan. 12, around 760,000 mt of jet fuel was scheduled to arrive into Europe from East of Suez in January, according to Platts cFlow trade-flow analytics software and fixtures from shipping sources, down from 1.02 million mt for the whole of December.

More jet should come from the Persian Gulf and the West Coast of India in February but the US Atlantic Coast is likely to continue pulling barrels from Europe and the East of Suez.

"I believe the US is pulling quite a lot of European jet," another trader said. "A few of the sellers in the market had to turn around and buy back cargoes... This is a supply side issue."

As 2022 started, stocks of jet fuel were low to very low across all of Europe, with the exception of the Amsterdam-Rottwerdam-Antwerp hub, where jet fuel/kerosene inventories on Jan. 5 were 5.5% lower than at the same time in 2021 but 59% higher than in the same week of 2020, according to Insights Global data.

While companies often try to keep a minimum of stocks on their books at the end of the year for accounting reasons, the low levels of stocks for jet fuel amid such low consumption is mostly explained by the backwardated structure of the jet fuel market over the past few months.

"Jet demand was better than expected [at the end of last year]... the market is still backwardated so nobody has a reason to stock up," another middle distillates trader said, adding he was surprised by the resilience of jet fuel demand.

In the jet fuel paper market, January NWE cargo differential swap increased by $2.75/mt on the day to a $61.25/mt premium to ICE LSGO frontline Jan. 12, while the February differential swap also rose $1.25/mt to reach a $47/mt premium.

The front-month/second-month ICE LSGO backwardation widened to $8.25/mt on Jan. 12 and the second-month/third-month backwardation increased to $8.50/mt.

REFINERS HOLD THE CARDS

When European countries first started going into lockdown in March 2020, refiners had to slash production as their storages quickly filled amid the plunge in demand for transportation fuels. Since then, they have increased runs as demand recovered, especially for road fuels, and production rates even neared pre-pandemics levels at the end of summer 2020 and 2021. But jet fuel production stayed very limited in Europe as yields were kept low because jet cracks had traded below diesel since the start of the pandemic.

However, this has recently changed, at least for physical cracks.

The FOB FARAG jet fuel barge crack versus Dated Brent gained 21 cents/barrel on the day to a two-year high of $15.44/b Jan. 10, which brought the jet fuel barge crack to a 27-month high of a $2.45/b premium over FOB ARA ULSD barges versus Brent, Platts data showed. On Jan. 12, the jet barge crack was assessed $1.38/b above the ULSD barge crack, according to Platts data.

Still, even if refiners were to increase jet yields, run rates in Europe are not currently high as refinery margins have been under pressure from the record-high natural gas prices over recent months, subsequent strong rise in hydrogen prices and the rising cost of carbon.

Given this, it would not be surprising if the jet market remains tight for a while, especially when demand starts to pick up amid expected easing of international travel restrictions over the coming months.