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Watch: New US jet fuel arbitrages emerge in the wake of hurricanes, pipeline changes

Hurricanes in the US this year spurred US Gulf Coast jet fuel differentials to reach highs not seen since 2008, with refinery, pipeline and port closures all disrupting the market. Daron Jones shares how differentials spiked not just along the Gulf Coast but also along the US Atlantic Coast, opening an unusual arbitrage for cargoes to come from Northwest Europe. Further, how long will a new domestic arb between US coasts remain open?

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Video Transcript

New US jet fuel arbitrages emerge in the wake of hurricanes, pipeline changes

By Daron Jones, Americas jet fuel editor

Welcome to the Snapshot, a series examining the forces shaping and driving global commodities markets today.

US jet fuel differentials recently returned to pre-storm levels after hurricanes Harvey and Irma caused prices to rise to highs not seen since Hurricane Ike hit the Gulf Coast back in 2008. Harvey disrupted Gulf Coast jet supply along several fronts. Production stopped as refineries were forced to shut down, and most took weeks to fully start up again.

Refinery, pipeline and port closures all disrupted USGC jet supply during Hurricane Harvey

The pipelines that carry jet from the Gulf of Mexico up to the East Coast and Midwest also shut down temporarily. And Harvey also forced Gulf Coast ports to close, so refined products could not be brought into the Gulf by barge for an emergency supply boost during the worst of the storm.

The infrastructure situation was not nearly as bad for Hurricane Irma, but both storms caused a rapid and massive rise in jet differentials.

Gulf Coast diffs rose from pre-storm levels, around NYMEX minus 10 cents per gallon, to as high as plus 25 cents per gallon during the worst of Harvey. The spike was more dramatic on the upper Atlantic Coast, where jet prices surged from around minus 5 cents per gallon all the way to plus 42 cents per gallon.

To make matters worse, the Atlantic Coast was already starved for jet supply: the region’s inventories dropped to a two-year low just prior to the first storm. This tightness was only exacerbated by the hurricanes, and opened a reverse arbitrage between Europe and the US East Coast. Jet fuel cargoes started coming in to New York Harbor just before Harvey hit, and data from Platts cFlow and US Customs shows they have not yet stopped.

Nearly 4 million barrels came into NY Harbor between Aug. 23 and Oct. 5 on unusual arbitrage

Nearly 4 million barrels came into New York Harbor between August 23 and October 5, the first such upper Atlantic Coast import wave in 2017. It is unclear how long this may continue, as this arb play from Europe to the US is unusual because Northwest Europe is net short on jet fuel.

As 2017 winds down, traders will also be closely monitoring the domestic arb between the Gulf Coast and New York Harbor. This arbitrage opportunity was closed for much of the first half of 2017. However, it has been mostly open since June, when Colonial Pipeline announced that its distillates-only Line 2 was not allocated for first time in six years.

Until next time on the Snapshot — we’ll be keeping an eye on the markets.