Jet fuel cargo prices reach seven-month low despite tight supply

04 October 2011 15:26  [Source: ICIS news]

LONDON (ICIS)--According to ICIS data, European jet fuel cargoes are trading at their lowest levels since February 2011 despite sources noting tight market conditions and high jet fuel differentials over ICE gasoil on Tuesday.

Cargo prices are assessed at $958.50–961.50/tonne CIF (cost, insurance and freight) NWE (northwest Europe), with prices this low last seen on 18 February when values were between $946.75–947.75/tonne CIF NWE.

The key driver behind low flat prices is ICE gasoil, which has been gradually decreasing in value throughout the past week, with the latest daily settlement closing at $874.50/tonne (€665/tonne) on Monday afternoon.

These softer ICE gasoil numbers are a result of a decline in crude oil futures caused by concerns over the eurozone economy.

In fact, investment bank Goldman Sachs has slashed its 2012 forecast for Brent crude from $130/bbl to $120/bbl in expectation that “financial stress in Europe will continue to present headwinds to economic and oil demand growth next year”.

However, resulting low outright jet fuel prices – calculated by adding ICE gasoil values to jet fuel differentials – are in stark contrast to the tight conditions currently being experienced in the market.

In fact, jet differentials over ICE gasoil for both barges and cargoes are currently at high levels of the low-to-mid $80s/tonne FOB (free on board) ARA (Amsterdam-Rotterdam-Antwerp) and the mid-to-high $80s/tonne CIF NWE, respectively.

Many reasons have been given for higher jet fuel differentials over ICE gasoil.

Sources said that refineries are currently favouring diesel production over jet as the margins are better, meaning less jet fuel is available on the market.

Furthermore, a backwardated market and weak prices mean that players have not been storing material, heightening any reaction to decreases in supply.

One source said there is new demand for jet cargoes from the Baltic region. However, with Scandinavian refineries favouring diesel production and UK refineries producing burning kerosene, the quantities needed are being taken from the ARA region, putting further pressure on supply.

The main driver behind recent increases in jet fuel differentials, however, is believed to be the recent fire at Shell’s 500,000 bbl/day refinery on Pulau Bukom in Singapore.

It is thought that jet fuel cargoes destined for the European market from the region have now been redirected back to Singapore to cover any shortages that occur there in the aftermath of the fire.

This has led to tightness within the European cargo market, with one source saying that players have been approaching the barge market for volumes instead.

However, another source said that “the fire in Singapore is at least a month’s voyage away”, adding that the immediate effect on the European market is “surprising”.

However, it is not thought that the tight conditions will remain for long.

The International Air Transport Association (IATA) released statistics this week showing that demand growth in the passenger market fell by 1.6% in August compared with July.

Additionally, the air freight market experienced a decline of 3.8%, more than doubling the contraction of 1.8% seen earlier in July.

These statistics point towards a possible slowdown in airline demand for jet fuel, which could help balance tight supply.

Furthermore, limited supply due to the fire at Shell’s Pulau Bukom refinery may be short-lived.

Pieter Kulsen, the founder of crude and products research firm PJK International, believes that the tight situation will only continue in the short-term, with the possibility that “other arbitrages could open up”.

($1 = €0.76)

By: Sarah Trinder
+44 20 8652 3214

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