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Feature: US jet fuel premiums to diesel widen amid diverging fundamentals

Houston — US Gulf Coast jet fuel prices reached their highest premium over ULSD in more than a year this week, driven by tight supply and a diesel market awash in product.

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Jet prices jumped to a premium against diesel in late November, as seasonal trends took hold and demand for ULSD started to vanish. While it marked the first time since the summer that ULSD was cheaper than jet fuel, the spread was volatile through most of December.

That changed Wednesday when USGC jet fuel climbed to NYMEX February ULSD minus 6 cents/gal, compared with minus 9.25 cents/gal for ULSD. That 3.25 cents/gal was the widest spread between the products since September 11, 2017, during the aftermath of Hurricane Harvey.

Diesel prices have been under heavy pressure since 2019 began, pushed down by lackluster demand and high inventories.

"Refiners have a lot of length they need to sell," one trader said. "The export markets are absolutely brutal."

Gulf Coast ULSD stocks rose 3.01 million barrels the week ended January 4 to an 11-month high of 37.65 million barrels, while jet inventories shed 2.16 million barrels to a three-week low of 14.03 million barrels, according to recent US Energy Information Administration data.

Diesel typically commands a premium to jet fuel because of its significantly lower sulfur content and its required biofuel compliance. But the cost of that compliance has fallen sharply since the new year started.

The current-year Renewable Volume Obligation price was assessed Wednesday at 2.65 cents/gal, down 57 points/gal from its last assessed 2018 level. A cheaper RVO price typically encourages diesel production over jet fuel, leading to higher prices for the aviation fuel.

That rule has held for the RVO price's recent downturn. Total US jet production fell 47,000 b/d to 1.85 million b/d last week, while ULSD output rose 38,000 b/d to 5.18 million b/d, EIA data showed.

USAC JET TAKES OFF

Atlantic Coast jet fuel differentials have been particularly bullish in the new year, climbing to a 16-month high and dwarfing diesel prices.

Jet on Buckeye Pipeline in the New York Harbor was assessed Tuesday at NYMEX February ULSD plus 13 cents/gal, its highest mark since it reached plus 14.50 cents/gal on September 7, 2017. Diesel on the same pipeline system was assessed at February futures minus 0.55 cent/gal, its lowest price since August 2.

Similar to the Gulf Coast, that 13.55-cent/gal premium for jet fuel over diesel was the widest it has been since September 7, 2017. USAC jet inventories averaged 8.97 million barrels in December 2018, according to EIA data. That was down from 9.09 million barrels from the same period the previous year. Regional inventories dropped further the first week of 2019, falling 664,000 barrels to 8.42 million barrels.

Sources said jet barrels coming up Colonial Pipeline from the Gulf Coast were scarce for the final cycles of 2018. That scarcity, combined with declining imports into the region, have pulled prices up.

"Hit a few cycles of very light shipping, this is the result," a jet trader said.

Jet fuel imports into the Atlantic Coast averaged 15,250 b/d in December 2018, down from 38,000 b/d in November, EIA data showed. The average for December 2017 was 107,800 b/d.

"I'm having trouble finding sellers," said a USAC jet fuel broker.

Suppliers did attempt to supplement stocks by bring in more jet imports the first week of January. EIA showed jet imports into the Atlantic Coast rose 49,000 b/d to 56,000 b/d, highest since reaching 57,000 b/d the first week of November 2018.

(CORRECTS point decline of RVO)

--Joshua Brown, joshua.brown1@spglobal.com

--Daron Jones, daron.jones@spglobal.com

--Edited by Jennifer Pedrick, jennifer.pedrick@spglobal.com