European jet fuel forward cracks point to need for further refinery run cuts

New York — European jet fuel cracks have plummeted to such an extent that European refinery run cuts look insufficient to offset lost demand given the high levels of arrivals expected from East of Suez markets in April, market sources said.

Forward jet cracks, meanwhile, were below the physical crack in negative territory.

"It makes sense," a trader said. "If you believe that demand is going to be very low and that refineries, which are reducing throughput now, will still produce more than the market demands", then one would expect to see future jet crack spreads trading at a discount to the cash crack.

A cash crack spread, sometimes known as the physical crack spread, shows the difference in value between physical jet fuel and crude oil.

By contrast, forward crack spreads show the difference between the value of jet fuel paper market swaps versus crude futures. S&P Global Platts assesses both types of cracks.

One of the key challenges for the jet market is that the fuel is a distillate cut from the middle of the barrel. That means that for most refineries, it is challenging to process oil without making at least some jet fuel.

While S&P Global Platts Analytics research showed European refineries have cut some 2 million b/d of throughput -— 180,000 b/d in Northwest Europe and 1.819 million in the Mediterranean -— due to discretionary run cuts, maintenance and planned idling of units, those refineries were expected to continue adding jet fuel to a market that is already over supplied.

"Refiners have to produce some jet fuel, some of the gallons produced today may not be used until 2021. Under the circumstances, I would expect forward prices to be very low," said Philip Verleger, an energy economist based in the US.

On Tuesday, Platts assessed the jet fuel front month FOB FARAG barge swap crack versus Brent crude futures at minus $6.42/b, the lowest for the assessment since it began in June 2015. It was at minus $5.87/b Wednesday.

Forward barge cracks for diesel and gasoil were also at all-time lows, while the forward crack for Eurobob gasoline was in negative territory.

Meanwhile, the physical crack for jet FOB FARAG barges versus dated Brent remained positive at $5.44/b, up from $3.11/b on April 9 -- its lowest level since August 2002.

Surprisingly, the Platts Forties crude physical Amsterdam-Rotterdam-Antwerp cracking netback refinery margin was at $4.01/b Wednesday, above a December 2019 low of minus $1.37/b when traders first began to talk of the need for refiners in Europe to cuts runs, even before coronavirus.

Similarly, the Platts CPC blend Italy cracking netback refinery margin was at $9.43/b Wednesday, above a December low of $4.24/b.

These physical margins will likely quickly deteriorate should poor forward cracks be realized.

According to Verleger, the drop in forward cracking margins relative to cash cracks highlighted the uncertain future airlines were facing.

While passenger airlines have slashed capacity since the outbreak of coronavirus, planes were continuing to take to the skies, moving people, medicine, and other goods as nations around the world fight COVID-19 and keep their economies running.

But looking ahead to later in the year, "I would expect forward jet prices [and by extension jet refinery margins] to be very low because the airlines have no idea when their customers will have the confidence to come back. Thus there are no buyers in the forward market. In fact, the airlines that had hedged are probably selling."

East of Suez, US unlikely to take Europe's supply glut

According to data from Insights Global, stocks of jet fuel in the ARA hub rose above the 600,000 mt level last week, the first time that has happened this year.

Stocks were expected to continue to rise amid a strong contango market structure, with jet fuel also entering floating storage.

Around 1.7 million mt of jet fuel has been fixed to arrive into Northwest Europe in April from East of Suez markets, which would be deemed a healthy level even in a normal demand month, data from Platts cFlow, trade flow software, showed.

From previous fixtures with UK Continent disport options in April, some jet fuel looked to be diverting to the US, with 120,000 mt headed to New York aboard the Hafnia Africa and BW Rhine, while the UACC Eagle, carrying 60,000 mt of jet fuel, was headed to the US Virgin Islands.

But Europe is unlikely to reduce its glut of jet fuel through diversions to the US. Data from the US Energy Information Administration on Wednesday showed implied US jet fuel demand plunged 39% week on week to a record low 460,000 b/d in the week ended last Friday, April 10, with a sizeable 6.28 million barrel build in US jet stocks during the week.