European jet fuel swaps collapse after Trump flight bans

The European jet fuel swaps market collapsed Thursday morning after US President Donald Trump announced sweeping flight restrictions from 26 European countries in an attempt to curb the spread of coronavirus in the US.

The March CIF NWE jet differential swap traded as low as $2/mt in the morning session after being assessed at $9.25/mt Wednesday, Platts data shows. In a volatile trading session the front month April swap traded at $3.50/mt, down from an assessed value of $9.25/mt, and the May swap traded at $5.50/mt, down from $12.75/mt.

The front and second month swaps were trading well below all-time assessed lows of $8.75/mt and $12.5/mt hit on Monday.

The global jet fuel market is in freefall as the spread of the coronavirus outbreak globally is massively curbing demand as flight cancelations increase.

"European jet demand was already suffering due to less domestic travel, and this is the nail in the coffin," Olivier Jakob, founder of energy consultant Petromatrix said. "Jet storage tank space is going to be a rare commodity in Europe that will be a growing problem for refiners in Europe and the Middle East."

Jet fuel is normally a very lucrative product for refiners and in 2019 the product provided the best margins for refiners. But 2020 is an entirely different story.

"It is quite unbelievable, it feels like the market will drop further on flat price; this is horrendous for global trade," a jet fuel trader said. Another jet trader described recent events as "a bad dream."

Storage concerns

Sources said that a lot of jet fuel will end up in storage due to low demand and excess supply, but questions were raised over the amount of storage available.

"Airlines won't be able to [buy jet fuel] as tanks are full and there's no flights. A lot of oil is moving from Asia to Europe, arriving in April which will ultimately have to go into tanks," added another trader.

Trading sources also said if more airlines cancel flights in the region some of them might have to resort to using the force majeure clause in their jet fuel supply contracts.

"We are licking wounds, and working out the consequences -- a crazy market," said a source from an airline. "A lot of demand is coming from all the [jet fuel] suppliers, they want to put jet in tank. There is barge and pipe demand," he added.

The jet FOB ARA barge premium to front-month ICE low sulfur gasoil futures strengthened to $9/mt Wednesday from a low of $5.75/mt on March 4.

Sources also said that refiners were adjusting their yields to move jet fuel into the diesel pool, at the same time as existing jet fuel being blended into diesel.

Low arrivals into Europe in March due to the heavy turnaround season in the Persian Gulf was providing some support to the market in March.

More measures likely

"While it is impossible to quantify the potential impact on demand for crude and its products, jet fuel represented around 8% of overall US petroleum consumption in 2018, while wider transportation made up almost 70%," said Jack Allardyce, oil and gas analyst at Cantor Fitzgerald Europe.

"The US is the world's largest consumer of oil, [accounting for] almost 20%. While numerous other countries have already implemented more region-specific travel bans, there is clearly scope for wider measures globally, which could further hit underlying demand for oil."

The US measures prevent any travellers from EU member countries in the Schengen border-free travel area flying to the US and go into effect on Friday at midnight EDT.

The UK, Ireland and other non-Schengen countries are unaffected and US citizens are also exempt from the ban.

Trade group Airlines for America said the measure would hit the US airline industry "extremely hard."

There were 1,135 confirmed cases of the coronavirus across the US, with 38 deaths as of Thursday morning.