OUTLOOK '13: Asia jet kerosene demand seen modestly growing in 2013

21 December 2012 03:09  [Source: ICIS news]

By James Dennis

SINGAPORE (ICIS)--Asian jet-kerosene demand is expected to continue to grow modestly in 2013, along with price volatility, with growth principally centred on China as the region remains a key area of expansion in the global airline industry.

Continued refinery capacity additions within Asia and also in the Middle East will maintain robust levels of supply within the region.

Outright jet-kerosene prices are closely correlated to crude values and like crude are greatly influenced by global economic activity and geopolitical events.

As with crude, jet kerosene prices have been volatile in 2012 as a result of the eurozone crisis, the slowdown in the Chinese economy, and Middle East tensions.

This price volatility is likely to continue into 2013.

Asian jet prices FOB Singapore peaked in March 2012 climbing above $137/bbl (€104/bbl) amid heightened geopolitical tensions between the West and Iran and fell to a low of around $106.20/bbl in June principally on Eurozone fears.

Prices climbed back $130/bbl in September amid further supply worries but have trended lower into the fourth quarter on global economic worries and the US budget issues and are presently around $124-125/bbl.

The International Monetary Fund (IMF) has raised its forecast for global growth to 3.6% for 2013, up from 3.3% for 2012 driven by developing Asian economies and principally China. The Chinese economy has shown positive signs of recovery in late 2012 with improvements in manufacturing output and a surge in oil demand.

Both the US and China are forecast to improve economic growth in 2013.

However, the eurozone debt crisis is likely to continue to be a major issue.

Meanwhile, Middle East tensions including the Iran nuclear issue, the Syrian civil war and unrest in Egypt and elsewhere are set to continue into 2013.

In its latest monthly report, the International Energy Agency (IEA) forecasts that “Global oil demand growth is expected to stay relatively sluggish through 2013, based on the continued assumption of tepid global economic expansion”.

The IEA forecasts 2013 global oil demand at 90.5m bbl/day up 865,000 bbl/day on 2012. According to IEA data global jet fuel and kerosene demand in 2012 is around 6.3m bbl/day with approximately half of the demand generated by the US and Europe.

The IEA forecast that Chinese demand for jet fuel and kerosene will grow by 3.1% in 2013 rising to 450,000 bbl/day from 436,000 bbl/day in 2012.

By way of comparison jet fuel and kerosene demand in Japan, the region’s second largest economy, is estimated by the IEA at around 360,000 bbl/day in September 2012.

Demand from China is a major driver in the Asia Pacific jet-kerosene market.

China Aviation Oil (CAO) is the largest physical jet fuel trader in the Asia-Pacific region and the key supplier of imported jet fuel to the civil aviation industry in China.

CAO has continued to issue its regular monthly import tenders and along with PetroChina has become an increasingly active player in open market trading in Singapore particularly during the fourth quarter of 2012 and this is expected to continue into 2013, sources said. 

Refinery operating rates in Asia remain high at the present time amid low levels of refinery maintenance in the fourth quarter of 2012 and good distillate refining margins which has served to boost supplies of jet-kerosene in the Asia Pacific region.

Refinery operating rates in China hit a record high of 10.12m bbl/day in November 2012 according to figures from the National Bureau of Statistics.

Rates were boosted as refineries returned after shutdowns and new capacity additions came online.

Some 500,000 bbl/day of addition refining capacity is forecast to come online in China between fourth quarter of 2012 and first quarter of 2013 according to the IEA.

Jet-kerosene crack spreads remain healthy at around $18-20/bbl and are likely to remain strong into 2013. The crack spread is the differential between prompt kerosene swaps FOB Singapore and Dubai swaps and used as a measurement of refining margins.

Upcoming refinery maintenance shutdown’s in northeast Asia particularly in South Korea and the Middle East are expected to tighten supplies of jet-kerosene in the first and second quarters of 2013. 

However, the impact of shutdowns in 2013 will be offset by further capacity additions which the IEA has said including a potential 400,000 bbl/day of new capacity coming on line in India and the start up of the new 400,000 bbl/day Jubail refinery in Saudi Arabia.

The upcoming Chinese New Year in February 2013 is likely to continue buoy prices and demand for jet-kerosene into January with the air passenger volumes set to increase in the region as people take holidays and visit relatives during the festive period, sources said.

The arbitrage window for moving spot jet-kerosene cargoes from Asia to Europe remained closed in November and December which also boosted supplies within Asia.

European airline demand has been impacted by the weak economic growth of debt-laden European nations.

Nevertheless, persistent cold winter weather in Europe could open arbitrage window for shipping spot jet cargoes from Asia to Europe with jet used as a blends stock to boost heating gasoil supplies.

Cold winter weather in northeast Asia has already increased demand for January 2013 heating kerosene.

Premiums in northeast Asia have risen on increased imports of jet-kerosene by Japan. Japanese refiners have been maximising their heating kerosene output rather than producing jet in order to cater to the domestic heating fuel market, sources said.

The International Air Transport Association (IATA), the leading industry body, expects airline profits in the Asia Pacific region to rise to $3.2bn in 2013.

However, profits continue to be undermined by weakness in regional air cargo markets reflecting the impact of the global economic slowdown on the export orientated economies of Asia such as China.

Nevertheless, there is some optimism that air cargo volumes may pick in 2013 buoyed by expected improvements in U.S. demand for consumer goods.

IATA data also revealed that domestic air travel in China continues to expand strongly, with October demand 7.5% higher than a year ago.

Meanwhile, domestic air travel declined significantly in India and to a lesser degree in Japan during 2012 amid difficult economic conditions in both nations. 

Asian jet-kerosene prices are likely to remain volatile in 2013 amid continued global economic and political uncertainty and dependent on the strength of the recovery in the Chinese economy.

($1 = €0.76)

By: James Dennis
+65 6780 4327

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