US-Iran war risk lifts European jet fuel curve above diesel despite supply glut

The European jet fuel forward curve is stronger than diesel despite a negative physical regrade and an oversupplied jet market, driven by risk premium from the US-Iran war, according to market participants.

The physical regrade, which is the spread between the jet FOB barge crack and 10ppm diesel FOB barge crack, was at minus $11.89/barrel Aug. 12, according to data from Platts, part of S&P Global Energy. A negative regrade incentivizes refiners to maximize diesel production over its co-distillate jet fuel.

This comes amid an oversupplied European jet market, with heavy imports from the US and Nigeria and a weaker-than-expected growth in European summer air travel demand, traders said.

"Refineries had maximized jet fuel output for months, which has led to this oversupply," a Europe-based jet trader said. "The US and Dangote are sending a lot even now with low differentials, and India is sending the usual volumes."

The negative regrade is also a product of physical tightness in the diesel, following the implementation of Russia's export ban.

One Europe-based diesel trader said the "East Med is struggling" due to a lack of Russian flows.

US refiners continue to produce elevated volumes of jet fuel despite favorable economics for ULSD, as uncertainty about the US-Israel war with Iran weighs on the global supply outlook.

Despite oversupply in the European jet market and a physical regrade in favor of diesel, the jet fuel forward curve remains stronger than diesel, with the risk premium from the war.

"Refineries are max diesel now, but down the curve jet is still stronger, so we will see — it's all because of paper. Paper is not reflecting the physical market," the jet trader said.

Platts assessed the Jet CIF NWE Cargo Financial balmo for August at $1,301.25/metric ton Aug. 12, while the same for 10ppm diesel was slightly higher at $1,299.25/mt.

The curve is even stronger for jet fuel in September and October, despite being a seasonally low-demand period for flying.

Platts assessed the Jet CIF NWE Cargo Financial for September at $1,280.75/mt Aug. 12, while the same for diesel was at $1,248.25/mt.

For October, jet was assessed at $1,245/mt and diesel at $1,192.5/mt, showing that the spread widened further in favor of jet fuel in the latter part of the year.

"Overall, there is a healthy supply [of jet fuel], but paper says otherwise; since the war started, paper has been inflated — paper and physical are not aligned," the jet trader said.

A second diesel trader said the diesel paper market is "not currently pricing [risk] fully in down the back end of the curve, as there is time for resupply to come back into play and for the geopolitical picture to improve."

This means that participants find it "hard to hold deferred positions for a long time given how choppy the market is," which could be contributing to the dissonance between paper and physical, the second diesel trader said.