Asian jet cracking margin lowest in 16 years; bleak global outlook

Singapore — Asian jet fuel cracking margin fell to its lowest in over 16 years at the close of Asian trade Tuesday, as the outlook for the aviation sector remained bleak in light of the recent spate of travel restrictions and country lockdowns, industry sources told S&P Global Platts.

At the Asian 0830 GMT close on Tuesday, the front month April jet fuel/kerosene crack spread against Dubai swaps -- a measure of the relative strength of a product against the crude it is produced from -- fell below the $4/b mark and stood at $3.71/b, down 64 cents/b on the day. This represented a 75.46% plunge since the beginning of the year when the cracking margin had stood at $15.12/b.

This also marked the lowest jet fuel crack spread, otherwise known as the cracking margin, against Dubai crude swaps since July 9, 2003, when it was assessed at $3.59/b, S&P Global Platts data showed.

In the physical spot market, the FOB Singapore jet fuel crack against front month cash Dubai fell to $4.97/b at the Asian close Tuesday, representing the lowest level in over a decade since June 5, 2009, when it was assessed at $4.74/b, S&P Global Platts data showed.

Market participants attributed the underwhelming cracking margin to bearish sentiment as a result of the coronavirus outbreak, which led to a spate of travel restrictions, reduced flight capacities and lockdowns, industry sources said.

In the Philippines, President Rodrigo Duterte ordered a lockdown last week from March 15 to April 14 due to the coronavirus pandemic, and on Monday, Malaysia's Prime Minister Muhyiddin Yassin announced a partial lockdown that bars citizens from leaving the country from March 18 until March 31.

"Everyone is suffering from the loss of demand ... there are excess [jet fuel] cargoes," a trading source said earlier in the week.

"The market is really bad ... and the lower margins will force refineries to do more run cuts," a refining source added.

According to a Sydney-based aviation consultancy, CAPA Centre for Aviation, most airlines in the world will be bankrupt by May 2020, and that many airlines have "probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants," it added.

Separately, the airline trade association IATA on Tuesday confirmed that the worst-case scenario for global airline losses has become a reality, with expectations of a $113 billion decline in revenue, adding that global airlines will need up to $200 billion in government support to combat the coronavirus pandemic.

The bearishness in the aviation sector is expected to prolong with the Q2/Q3 jet fuel/kerosene quarterly spread remaining in negative territory and falling to minus $3.77/b at the Asian close Tuesday -- a level lowest since June 29, 2009, Platts data showed.