Easing of European lockdowns fails to animate jet fuel traders

The European aviation industry is starting to gear up for summer, but it may not be enough to support the jet fuel market over the next few months, traders said. "There is no demand with no need to sell, which means a stagnant market," a middle distillates trader said.

Jet fuel has been the largest casualty of the coronavirus pandemic as aircraft fleets have been grounded and borders closed. Demand for aviation fuel in April collapsed as the sector halted due to lockdown measures in place in most of the world.

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Nonetheless, jet values versus ICE low sulfur gasoil futures have recovered over the past few weeks on refinery run cuts and improved airline capacity.

CIF NWE jet fuel cargoes were assessed on June 4 at a $22.00/mt discount to ICE LSGO futures, compared with the discount of $67.25/mt seen on May 4.

Some traders were wary of the rise in value as they expected many players were waiting to release their barrels from floating and land-based storage which could see a flood of product onto the market.

Additionally, refiners continue to grapple with thin margins and look to prioritize diesel and gasoline, with jet being fed into the blend pool.

"Rebalancing yields to meet much lower jet demand increases diesel yields sharply," S&P Global Platts Analytics said this week.

"Roughly 70% of jet precursors can be redirected to the diesel pool with only 30% going into heavy naphtha/gasoline."

Jet crack swaps remained below diesel, with the jet front-month FARAG barge versus ICE Brent crude futures calculated at minus $1.40/b on June 5, while the diesel ARA barge equivalent was $2.54/b.

Boost to aviation as lockdowns eased

As lockdowns restrictions are further eased in coming weeks and Mediterranean countries throw open their borders to tourists, an uptick in seat capacity was expected. Most intra-European borders will reopen on June 15.

"There is still no demand for jet fuel but the opening of borders could be next impetus," a second distillates trader said.

In Europe, budget airlines such as easyJet and Ryanair have said they will be increasing capacity over the next few weeks, with easyJet saying three-quarters of flights will have resumed by August.

Further afield, Virgin Atlantic said some international flights from London Heathrow will resume on July 20, after the fleet has spent four months stuck on the tarmac.

Looking at the forward curve, the CIF NWE jet cargo swaps curve has rallied since the long-term lows seen March but still prices a slow and gradual recovery until 2022, remaining at a discount to ICE LSGO futures until November.

At the beginning of January, the December 2021 future price for jet fuel was assessed around $600/mt by S&P Global Platts. It was at $420.25/mt on June 4.

Paper jet traders said a lower clean tanker freight environment was underpinning the recent jet swaps rally by supporting floating storage and exporting economics, but echoed that demand was not expected to recover at least until after the summer.

Some trading sources said that with consumers holidaying at home and economies reopening in Asia, Europe and the US, diesel and gasoline demand will continue to improve and that will make space for jet fuel in tanks as road fuel inventories are drawn.