European jet market crashes on coronavirus demand destruction fears

London — The European jet fuel complex has crashed this week as the coronavirus outbreak, which the World Health Organization has now declared a global health emergency, heaps downside pressure on the market.

The physical Jet FOB FARAG barge crack sunk to $11.49/b Thursday, the lowest since early December 2019. In comparison value was assessed this time last year at $15.53/b.

Jet CIF NWE cargo differential swaps were hammered across the 2020 forward curve Thursday, as prices continued to come under pressure as prospects for jet fuel demand shrink as a number of airlines suspend flights to and from China and Hong Kong, and the market expects a supply glut of jet fuel.

"On the one hand the world is more knowledgeable than when SARS [occurred in 2003], but on the other hand we are more connected," said a trader. "The macro environment suggests it's going to fall quite a lot."

Jet CIF NWE cargo differential swaps continued to slide Friday morning, and last traded on the Intercontinental Exchange at $37.50/mt and $33/mt for February and March respectively. This is down from Thursday's assessment for February at $39.75/mt, which in turn was down by $4.50/mt on the day, and the March assessment of $36.50/mt, which fell $2.75/mt on the day. This morning's traded values on ICE are down from the January 28 assessment at $46.00/mt.

"It will be a race to the bottom," said a second trader.

The Q2 2020, Q3 2020 and Q4 2020 contracts fell $2.50/mt $2.25/mt and $2.75/mt on the day as a bearish atmosphere clung to the market. Despite the European summer months typically being a stronger portion of the curve due to peak holiday season demand, value was slashed Thursday by $1.25/mt and $2.00/mt for the July and August 2020 contracts to both be assessed at $39.00/mt.

The International Air Transport Association, IATA, said in a statement last Friday: "In the past, the airline industry has proven resilient to shocks, including pandemics... Even in the outbreak of SARS, monthly international passenger traffic returned to its pre-crisis level within nine months. Nevertheless, the very strong growth of the Chinese air transport market over recent years means that an additional 450 million passengers fly to, from and within China per year compared with a decade ago." IATA had no further comments to add Friday morning.

S&P Global Platts Analytics said this week that the most likely impact of the virus on global oil demand is a loss of 150,000 b/d over the next two months, while the worst-case scenario is 700,000 b/d over the next 36 months, primarily impacting jet fuel.

ICE LSGO FLAT PRICE SLIDES

The flat price environment has also taken a bearish turn as ICE LSGO futures have sunk over the course of the week. February ICE LSGO was trading at $506/mt Friday morning, down from Monday's assessed value of $512.00/mt. Sources have said that news of the virus is putting downward pressure on the ICE LSGO futures complex, which is causing a drop in gasoil prices on a flat price basis.

"People are keeping a close eye on flat price," a third trader said.

In the European gasoil market, sources have said the outbreak of the coronavirus in China has not directly impacted the European supply and demand balance, in contrast with jet fuel but has added to a bearish atmosphere.

"Gasoil demand in Europe is missing everywhere. We don't need much product at the moment, but for the whole distillate complex," the virus outbreak has supported bearish sentiment, a second source said.

These comments line up with Platts data, which shows that physical assessments for 0.1% sulfur CIF gasoil cargoes have dropped lower since news of the virus began to roil oil markets. On Thursday, the Northwest Europe assessments for 0.1% sulfur CIF gasoil cargoes was published at $508.75/mt, a $103.75/mt drop from the start of the month and the lowest that assessment has been since January 3, 2019.

With gasoil prices in Europe dropping sharply on an outright basis, cracking margins for gasoil in ARA versus front month Brent crude futures have come under severe downward pressure, hitting multi-year lows this week. On Monday, that crack was assessed at $10.71/b, its lowest level since July 7, 2017, Platts data show.