Jet fuel reclaims king of the barrel status in Europe amid demand revival

Profit margins for refining jet fuel in Europe have skyrocketed in recent weeks driven by strong seasonal demand, combined with low stocks and a lack of local supply.

Jet fuel is now the most lucrative oil product in the barrel, with crack spreads climbing to record highs recently. Jet fuel prices are now trading at their typical pre COVID-19 premium versus diesel, trading sources told S&P Global Commodity Insights.

The physical crack spread for European jet barges hit a record high of $69.37/b on April 29 and has averaged $53-$66/b since then, according to S&P Global's Platts assessments. This was well above a pre COVID-19 high of more than $20/b reached Sept. 19, 2021. At the same time, jet fuel -- the typically premium product -- is competing with diesel for the first time in a long time.

Jet barge cracks averaged as low as $6.06/b and $4.07/b in 2021 and 2020, respectively, as the oil product was the biggest casualty of the pandemic's demand destruction. But the picture is finally changing in 2022.

The availability of aviation fuel looks set to lag an uptick in demand approaching the summer flying season despite a high oil price environment, traders said.

Pent-up demand, tight supply

There is strong pent-up demand to travel post COVID-19, according to a jet fuel trader.

"I don't think rising inflation and costs will prevent middle classes from going on holiday even if airline tickets are higher [given the pent-up demand]," said the trader.

The supply picture for jet fuel also looks tight, with flows from the East not as plentiful as previously expected.

About 520,000 mt arrived in Europe in April, down from previous estimates of around 710,000 mt, amid a closed arbitrage from the East to the West, according to estimates from S&P Global.

"The arbitrage flow [from the East] is decent but [more volume is] also needed. Not that much is really available [with] pretty much everything committed," said a second jet fuel trader.

Europe is net-short jet fuel with the balance arriving from East of Suez markets, such as the Persian Gulf, east coast of India and China.

Some supply arriving into Europe from the East is being pulled to the US, according to traders.

"There is a strong pull to the US, but good [import] resupply for end of May beginning of June," said the first trader.

That said, local European supply needs to rise, said traders.

"There is going to be a tug of war between diesel and jet cracks for the foreseeable future; jet demand really improving," said the first jet fuel trader.

"US distillate market super tight -- going into their driving and flying season now, US heating oil will drop off a bit but not as much as jet will increase," he added. "Everyone should be maximizing jet right now based on cracks, but as a result diesel will tighten and strengthen -- it's a circular dynamic."

Capacity rebound, hedging cover

Aviation data company OAG said it expects global scheduled airline capacity to rise into summer to 93% of the 2019 level for August, although it may fall back to 85% by that time.

"We are in recovery and things are getting back to normal even if they are a bit noisier than they have been for the last two years [referring to global scheduled airline capacity]," OAG said in a recent note. "It seems that unfortunately, we are also experiencing some growing pains as the travel recovery gathers pace."

The only headwind is China, where flights are being cut due to further lockdowns in major cities.

At the same time, European carriers have underwent some hedging, which should insulate them against higher prices and limit increases to airfares.

Air France KLM had hedged 63% of its fuel costs for the second quarter at $90/b while Lufthansa also hedged 63% of its fuel costs for the whole of 2022 at $74/b. IAG -- the parent company of Iberia, British Airways, Vueling and Aer Lingus -- is hedged at 60% for the next two years, and easyJet also at 60% but until the end of September, financial statements and media reports showed mid-March.

Looking elsewhere, US carriers appear more exposed to fuel prices while Asia airlines have undertaken some limited hedging.