European jet fuel in doldrums; demand woes to intensify

London — The jet fuel market in Europe looks likely to weaken further amid demand destruction as the coronavirus outbreak spreads further across the region.

Trading sources told S&P Global Platts that if more airlines cancel flights in the region some of them might have to resort to using the force majeure clause in their jet fuel supply contracts.

"It's pretty bearish unless something happens. Transportation volumes are down and it's hard to see when demand will pick up," said a source Wednesday. "Medium and small size airlines are in trouble," he added.

Jet fuel traders were also looking to put more jet fuel into storage to cope with the lack of prompt demand, as the whole supply chain is under stress, sources added.

"If airlines are not doing it, suppliers will... storage economics look good," said the source.

"There is not a huge amount of physical prompt availability [but] if you have barrels you put them into storage," said a second source.

Multi-year lows

Jet fuel flat prices and differentials to front-month ICE low sulfur gasoil futures have plummeted as a result of COVID-19. The start of a crude oil price war between Saudi Arabia and Russia has also driven jet fuel premiums to multi-year lows.

The jet CIF NWE cargo physical flat price was at $377.25/mt Tuesday, up slightly from a near four-year low of $365.5/mt Monday and down from a recent high of $664.5/mt on January 3, prior to concerns about demand destruction due to COVID-19.

Prices are expected to remain fairly stable Wednesday as at 1550 GMT ICE March gasoil was trading at $375.75/mt, up $6.50/mt from the previous settlement.

More and more refiners are blending jet fuel into diesel to cope with the lack of demand.

A large proportion of jet fuel supply in Europe comes from Middle East refineries and the west coast of India, but imports from these regions have been muted in Q1 due to refinery turnarounds. This has somewhat shielded the region despite softer demand.

"Arrivals into Europe are even lower for March than February," said the source. "I thought they would jump up because of Far East barrels but that hasn't happened, under 1 million b/d this month because of massive [Middle East] turnarounds," added the source.

However, refineries returning from maintenance in the Middle East, combined with the effects of demand destruction, could further pressure jet fuel differentials. "Demand destruction will kick in soon," said the second source.

Turbulence for airlines

The environment is getting increasingly difficult for airlines. British Airways, easyJet and Ryanair have all suspended flights to Italy in the past few days. Norwegian Air has cut 15% of its global schedule for the month and Lufthansa has reduced its flight capacity by up to 50% this week.

Passenger numbers at one of the world's busiest airports, London Heathrow, paint a very bearish picture. February passenger numbers fell to 5.4 million, down almost 5% on last year due to lower demand on Asian and European routes, Heathrow said in a statement.

Demand has continued to weaken going into March and the airport expects a further year-on-year decrease in the coming weeks.

Domestic UK airline Flybe has already gone bust and Korean Air has warned its survival is under threat, while the International Air Transport Association has warned that global airlines could rack up losses of up to $113 billion this year if the coronavirus outbreak worsens, which would be on the scale of the hit to the aviation industry during the financial crisis of 2008.