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Analysis: China's delta variant outbreak threatens jet fuel consumption during summer holidays

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Analysis: China's delta variant outbreak threatens jet fuel consumption during summer holidays

Highlights

Analysts cut jet fuel demand forecast by 70,000-200,000 b/d

China's September jet fuel exports to rise

Jet fuel prices remain pressured in Asia

China's jet fuel demand during the summer school holidays is expected to fall as the delta variant outbreak in Nanjing city has triggered renewed air travel restrictions that are unlikely to end by late-August, analysts said Aug. 4.

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July-August tend to be a peak season for long-distance family travel in China, coinciding with the school holidays.

However, the latest COVID-19 outbreak has prompted S&P Global Platts Analytics to lower its expected jet fuel demand in July and August to 800,000 b/d from a previous estimate of 870,000 b/d.

A few other analysts have even cut China's jet fuel demand forecast in August by up to 200,000 b/d from their previous estimations due to the wider-than-expected spread of the delta variant wave, which started from Guangzhou in late-May.

"I think China's overall product demand will be down by approximately 5% in the near term, and specifically for jet fuel, the impact will definitely be bigger. Some Chinese domestic airlines have canceled their flight schedules for now, and this will affect jet fuel demand for sure," a Singapore-based trader said.

Since the first delta variant outbreak in Nanjing, Jiangsu province, in eastern China on July 20, the virus has spread to several provinces.

On Aug. 3, 71 local infections were recorded in seven provinces across eastern, southern, central and southwestern China, according to the National Health Commission's release Aug. 4.

The Civil Aviation Administration of China announced Aug. 3 that passengers are allowed to refund the air tickets for boarding between Aug. 4 and Aug. 31 without any charges.

Moreover, schools in quite a few cities said students who travel during the holidays have to be quarantined for two weeks before the new semester starts in September.

Families are having to cancel their travel plans due to these measures.

Looking forward, "we expect the authority could contain the virus efficiently in H1 August and hope this round, virus will not erode Mid-Autumn festival travels in September and National Day holiday travel boom in early October," said Sun Jianan, an analyst with Platts Analytics.

Jet fuel exports to rise

Slowing domestic demand will lead to more surplus for exports, analysts said.

"We expect China to lift jet fuel exports in September due to slow domestic demand as it is a bit late to arrange August exports while the second batch of export quotas are not released yet," a Beijing-based analyst said.

Despite tight export quota availability, China's jet fuel exports have been on the rise.

A source with state-owned Sinochem said the company would use the coming allocation mainly for jet fuel exports to offset its high sulfur kerosene inventory pressure, as the surplus barrels are no longer exempt from consumption tax in the domestic market.

Moreover, kerosene is no longer popular to be blended with light cycle oil to produce gasoil since the latter also started attracting a consumption tax from June 12, the Singapore-based trader said.

China is expected to export 640,000 mt jet fuel in August, slightly higher than the estimated 630,000 mt in July, S&P Global Platts previously reported.

Jet prices tumble

The recent surge in COVID-19 infections in China has once again dimmed the outlook on an aviation recovery and pressured prices in Asia.

At the 0830 GMT Asian close Aug. 3, the FOB Singapore cash differential remained in discount territory of 21 cents/b to the Mean of Platts Singapore jet fuel/kerosene assessment, widening 4 cents/b day on day. The cash differential has been in a discount for more than 11 weeks, and was last seen at a premium May 17 at MOPS plus 25 cents/b, Platts data showed.

In addition, the backwardation seen in the balance-month August-September time spread on Aug. 2 proved to be short-lived, as it flipped into a contango structure of minus 5 cents/b on Aug. 3, widening 8 cents/b day on day, Platts data showed.

Further down the forward curve, the fourth quarter 2020/first quarter 2021 jet fuel quarterly spread -- an indication of near-term sentiment -- was seen a four-week low at plus 34 cents/b Aug. 3, narrowing 10 cents/b, or 22.72%, day on day. The spread was last seen narrower on July 5 at plus 23 cents/b, Platts data showed.