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FEATURE: US Q1 jet prices could take off in Q2 after lower Q1 demand

Houston — US jet fuel spot prices slipped slightly in the first quarter of 2019, but sources believe they should gain altitude in the second quarter as the industry prepares for the new International Maritime Organization regulations to take effect on January 1, 2020.

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The industry plans to use blending of various ultra low sulfur products to meet the new IMO specifications, causing jet fuel prices to rise through the summer.

Sources have said the IMO 2020 implementation will tighten jet supply -- already the smallest slice of the distillates pie -- even more, thus causing prices to spike.

"The squeeze on middle distillates is happening," a jet trader said. "This is key because the world will need more low sulfur middle distillates to meet IMO. Hammering the sulfur out of those products and investing in more ultra low sulfur distillate capacity are added ways to do it, rather than just sourcing lower-sulfur crudes."

Some were of the opinion that the spike has already started, and that IMO is already being "baked into the jet price." Others disagreed, saying they expect the effects will start showing in Q2.

"I find it hard to believe that it's completely baked into the price of jet right now," a USGC distillates broker said. "No one really knows how IMO is going to go. You would expect there to be some growing pains into mid-Q3 through Q1 or Q2 of 2020."

The broker added that Q2 jet has so far been lackluster. "I was personally expecting higher prices in the Gulf," the broker said. We're above the historical numbers, but with all the other things going on like gearing up to run more diesel, I expected things to be better."

The average spot price for benchmark US Gulf Coast jet fuel on Colonial Pipeline has averaged $1.9497/gal so far in Q2.

The trader said the real jet price spike has yet to be seen.

"In order to meet the IMO 2020 additional demand upon middle distillates, it would be necessary for the ULSD crack to rise by at least $5/b," the trader said. "Since 2017, ULSD cracks are now about $3/b higher. So, the short answer is, no, IMO impact is not quite baked into current ULSD product prices."

JET DEMAND GROUNDED IN Q1

S&P Global Platts assessed USGC jet fuel at an average of $1.8655/gal during Q1, down 2.36 cents from the Q1 2018 average.

The lower Q1 jet fuel prices were attributed to a variety of demand-impacting events that caused airlines to be in a near-constant state of cancelling or rerouting flights.

Jet fuel demand was hampered out of the gate by the US government shutdown, and by extreme bouts of winter weather throughout the quarter. The Boeing 737 Max grounding closed out the bearish quarter.

While jet fuel cost less in Q1, product supplied, an implied measure of demand, edged higher despite the variety of demand obstacles.

Jet fuel supplied totaled 1.716 million b/d in Q1 2019, up 16,000 b/d over 2018's Q1 total, US government data showed.

Stronger jet export numbers helped maintain demand strength in the face of the constant hits on demand.

US Q1 jet exports reached 198,846 b/d, up 42,231 b/d from the Q1 2018 total. Mexico and Canada topped the destination list for US jet, with Brazil continuing to raise its dependence on US jet.

The US West Coast is unique among American jet markets because of its reliance on product from Asia to balance the market. Jet imports into the USWC rose 37,011 b/d to 97,857 b/d in Q1.

Imports into the US Atlantic Coast fell 8,220 b/d to 60,462 during Q1.

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

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