Analysis: Asian jet fuel market recovery on the horizon as S Korea to resume international flights in June

Singapore — Asia's jet fuel market is set to accelerate on its runway to recovery after South Korea announced it will resume international flight operations as several countries around the globe begin to relax border restrictions, lifting entry bans from as early as June.

The easing of border restrictions in recent weeks had buoyed sentiment as domestic airlines took to the skies, and the market is bound to get another boost with South Korean airlines' latest plans to resume international flights next month.

"South Korea's Incheon airport is one of the busiest air traffic hubs in Asia alongside Singapore's Changi airport. Re-opening of flight routes to and from Incheon should lift regional jet fuel demand and [propel] recovery in refining margin for the fuel," a Seoul-based Korea Petroleum Association official said.

The FOB Singapore jet fuel/kerosene assessment has rebounded by more than threefolds from its trough of $13.06/b on April 22 to $37.79/b at the Asian close on Tuesday, S&P Global Platts data showed. The outright Singapore jet fuel/kerosene assessment, on the other hand, has more than doubled from $16.25/b at the beginning of May.

Platts had assessed the FOB Korea jet fuel cash differential at minus $2.60/b to the Mean of Platts Singapore jet fuel/kerosene assessments on Tuesday, 20 cents/b higher from last Friday. The cash differential had fallen to an all-time low of minus $4.65/b to MOPS jet fuel/kerosene assessments on April 22, Platts data showed.

The derivatives market has also reacted positively to the news, with front month June/July contango narrowing 17 cents/b from Friday to minus $1.18/b at the Asian close on Tuesday, Platts data showed. The spread has contracted by as much as $2.12/b month to-date. The last time the swap spread was assessed higher was on March 17 at minus 81 cents/b.

INTERNATIONAL FLIGHTS TO TAKE OFF

Major airlines in South Korea are looking to cautiously restart international airline routes as the COVID-19 pandemic appears to have abated. The country recorded 11,265 infections and 269 deaths as at 0500 GMT Wednesday, latest research from Johns Hopkins University showed.

National carrier Korean Air, the country's biggest airline, plans to increase its international capacity to 19 international routes on June 1 including Washington, D.C., Seattle, Vancouver, Toronto, Frankfurt, Singapore, Beijing and Kuala Lumpur. This will increase the airline's operations to 32 international routes with 146 flights a week from June 1. Currently, the carrier offers 55 flights a week on 13 international routes compared with 900 flights on 110 international routes before the outbreak of the coronavirus.

Meanwhile, the country's second largest carrier, Asiana Airlines, is also eyeing similar moves. The airline will resume 13 international routes from June 1 -- one to Seattle and 12 to Chinese cities including Beijing and Shanghai -- raising its services to 27 international routes from its pre-outbreak of 73 destinations. The move will raise Asiana's flight utilization rate to 17% in June from 8% in May.

Asiana also said it plans to resume three weekly flights to Singapore when entry bans are lifted.

Separately, budget carrier Jeju Air is looking to resume flights between Incheon and Manila in June, increasing its international flight operations from zero to four out of 82 in total. Meanwhile, Air Busan will begin to restore flights to China, Japan and Southeast Asia in July, a company official said.

FLIGHTS TO JUMP START FUEL DEMAND

The gradual restoration of international flights, a move viewed by industry participants as optimistic, could rekindle the country's jet fuel demand moving forward.

According to data released by Korea National Oil Corp. on Tuesday, aviation fuel demand nosedived 77.7% year on year to just 730,000 barrels in April, which marked the second consecutive monthly decline, after dropping 65.5% year on year to 1.14 million barrels in March. This brought jet fuel consumption over the first four months of the year to 8.07 million barrels, falling 37.1% year on year.

The country's jet fuel demand is expected to maintain its downtrend in May due to a sharp decline in air traffic volumes, before rebounding in the second half of the year when more flights are set to take-off from June, industry and refinery officials told Platts.

"I think the [sell off in the jet fuel market] was over-done previously ..... it fell too much," a refining source said, adding "now that Korean refineries are undergoing turnarounds, and with domestic and international flights taking off, this may help balance the supply/demand dynamics".