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Asian jet fuel crack spreads may crash toward $5/b as regional airlines cut back China routes

Highlights

Physical, paper Singapore jet fuel cracks tumble below $10/b

Vietnam Airlines, Cathay Pacific, Korean Air suspend multiple flights

Budget carriers also cancel numerous China-bound services

Singapore — Jet fuel refining margins may succumb to more downside pressure in Asia, with Singapore crack spreads against Dubai crude expected to test the $5/b mark over the next few trading cycles as Asian airlines suspend multiple flight routes in the wake of the coronavirus outbreak.

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Both physical and paper jet fuel cracks against Platts Dubai crude benchmark tumbled below the psychological support level of $10/b this week as aviation fuel demand continues to slide in line with the growing number of flight cancellations and suspensions.

Jet fuel

The FOB Singapore jet fuel/kerosene crack against front-month cash Dubai crude plunged to $8.95/b Thursday. At this level, the crack spread was just 4 cents/b shy of a 42-month low, Platts data showed.

In the derivative market, the front-month February Singapore jet fuel swap against Dubai swap -- which measures the relative value of the product to crude oil -- fell to $9.70/b at Thursday's Asian close, the lowest level in almost 32 months. The last time it was assessed lower was June 7, 2016, at $9.32/b, Platts data showed.

The crack spreads are unlikely to stage a meaningful recovery any time soon as regional airlines could cut back more flight routes as the coronavirus continues to spread, with more than 9,600 cases confirmed and the death toll in China alone above 200 as of Thursday.

Vietnam's national flag carrier Vietnam Airlines was reported to have suspended 70% of its flights to China.

In South Korea, two of the country's major airlines were quick to suspend various China-bound flight routes, further painting a bleak picture for Asia's aviation demand outlook. Korean Air, the nation's top flag carrier, has suspended all flights to Wuhan since January 23. The airline "is under discussions as to whether to suspend its flights to other Chinese cities," a company official told S&P Global Platts this week.

Asiana Airlines, South Korea's No. 2 carrier, also told Platts it has suspended flights to Chinese cities Guilin, Changsha and Haikou due to the conoravirus.

In Hong Kong, Cathay Pacific has reduced its flight capacity to and from China by 50% or more from January 30 to end March, while Cathay Dragon flights to and from Wuhan have been suspended until March 31.

Hong Kong Airlines said it was scaling back flights to China and canceling flights to smaller cities like Hang Zhou, Tianjin, Chendu, Chongqing and Guiyang. Other affected destinations include Shanghai Pudong, Shanghai, Beijing and Hong Kong.

Asiana Airlines will decide whether to extend flight suspensions depending on circumstances and the progress of the virus spread in China, a company official said. Flights to China account for 19% of its total revenue.

MORE DOWNSIDE

Apart from the region's major airlines, many budget carriers have also announced either cancellations or full suspension of China-bound flight services, adding to pressure on jet fuel demand and refining margins.

The crack spreads could test the $5/b mark over the next couple of months as more Asian carriers cut back on China-bound and other flight routes, according to multiple refinery and trading sources across China, South Korea and Japan.

"The Wuhan virus is having a deadly impact on the aviation industry; many flights have been canceled as a result and many people would be afraid to travel to China for sure," a North Asian refinery source said.

Singapore Airline's low-cost carrier Scoot will suspend flights to multiple cities in China until end March and cut back on its number of daily flights to eight other Chinese destinations, the budget carrier said on its social media notice.

Scoot will suspend flights between Singapore and Harbin, Hangzhou, Shenyang, Xi'an, Changsha, Nanchang, Zhengzhou, Ningbo, Jinan, Nanning and Wuxi, the company said on Facebook.

Vietnam's Ministry of Transport said the country's top private carrier Vietjet will suspend all of its flights to China from Saturday.

South Korea's low-cost carrier Jeju Air told Platts earlier this week it has suspended six of its 12 flight routes to China. The country's other low-cost carriers T'Way Air and Air Seoul have also suspended most of their flights to Chinese cities, including Wuhan.