ANALYSIS: European refiners hike jet fuel output after cracks hit 3-year highs: traders

European refiners are increasing their jet fuel production after physical cracks versus Brent hit three-year highs and jet fuel forward cracks settled above diesel cracks for the remainder of 2022, trading sources said.

Jet cracks rise

The January CIF NWE jet fuel cargo versus Brent crack was assessed at $18.69/b Jan. 18, a small drop from $19.42/b the day before, which was a 27-month high for the balance month crack swap.

Forward prices were descending from strong prompt values but remained above those of diesel for the rest of 2022. S&P Global Platts assessed CIF NWE jet cargo cracks at $15.88/b for February and $14.82/b for March, before bottoming at $14.10/b in June and then rising through to $15.61/b in January 2023.

Meanwhile, Platts assessed the diesel counterpart January CIF NWE cargoes versus Brent crack at $16.18/b Jan. 18, a drop from $16.60/b the day before, a 25-month high, with the February crack at $15.24/b and March at $14.35/b.

Refiners switch yields

Improvement in jet fuel cracks compared to diesel is set to lead refiners to swing production in favor of the aviation fuel, with the process having already begun, according to market participants.

"There is less incentive to blend jet into the diesel pool, so it has totally changed the picture we were seeing the last few months," a middle distillates trader told on Jan. 19. "The most interesting thing is, on spot there are better economics for jet, but also along the curve for 2022, which has not happened since the beginning of the pandemic. We now have a full year where economics look better for jet [than diesel]– it's a game changer," he said.

Supply was very tight due to which premiums and prices had increased, a second jet fuel trader said.

Supply of jet fuel was improving in the Amsterdam-Rotterdam-Antwerp hub with a couple of oil majors starting to offer jet fuel barges out of their refineries, he added.

According to a third trader, it would be logical for refiners to be maximizing jet yields but some jet was needed to improve diesel cold properties.

"I would expect most people to be on max jet but given we are in winter spec on diesel there is a limit to how much you can take out to meet cloud/density," he said.

In winter, the maximum cloud point of French spec ultra-low sulfur diesel is minus 5 degrees Celsius. However, the cold filter plugging point -- the lowest temperature at which a given volume of diesel type of fuel still passes through a standardized filtration device in a specified time when cooled under certain conditions -- was maximum minus 15 degrees in winter.

The switch towards jet and away from diesel production is set to tighten the European diesel market further, with traders sentiment bullish for coming weeks.

"Provided the gas prices are still so high, there is less incentive to desulfurize [higher sulfur gasoil to make diesel]. Refiners will rather produce jet, so there is quite some diesel leaving the picture," one diesel trader said.

Northwest European refiners have started to switch back to maximizing jet yields as jet fuel cracks price above all other oil products and it is widely expected that jet fuel demand will rebound in the spring.

In the Mediterranean, some refiners were taking a slower approach to resuming the production of jet fuel that was stopped almost completely in 2020 as the pandemic led to a plunge in air traffic, according to traders.

"It seems that the COVID situation is moving in the right direction," a fourth trader said, adding that in the Mediterranean, refiners were starting to produce, export jet again. "

"If jet recovers, then it is supportive for diesel, naphtha and gasoline.

However, if refineries start to increase rates, the things could get brittle ... Inventories are somewhat low, so unless refineries increased their runs a lot, jet should remain supported," he added.

Prompt supply tight

Cash differentials in the Northwest European jet fuel complex climbed to a three-and-a-half-year high with CIF NWE jet fuel cargoes rising to a premium of $74.25/mt over front-month ICE LSGO Jan. 14, up from $62/mt the previous week. This was the highest premium since March 2018.

Traders have been attributing the recovery in jet fuel's physical premiums to acute supply tightness in the prompt.

"I have not seen any spot available cargo of jet," a fifth trader told Platts mid-January.

"I think we should see more cargoes from mid-February," the trader also said, adding that unsurprisingly in winter time, there was no jet fixture coming to Europe from further East than India, given kerosene demand in the Asian market.

Furthermore, strong cash differentials for jet fuel cargo depend on whether or not one needed a cargo for very specific dates in Europe. "The Med market is like NWE, it is very tight, but [physical premiums] depend on when you need the product," he said.