US winter jet fuel spot prices a gamble

HOUSTON (ICIS)–With jet fuel prices at six-year lows it will be harder this year than most to predict a price pattern for the looming winter months. Some analysts call it a total gamble.

Jet fuel spot prices plummeted this week, with Monday’s US Gulf (USG) price assessed at $1.2525-1.2550/gal, led by the downward spiral in crude oil prices.

Jet fuel prices are typically traded at a discount to heating oil futures on the NYMEX, which largely follow crude. Prices have followed the sweeping pattern of crude over the last year: falling the second half of 2014, gaining back ground the first few months of 2015 and now again declining.

Heating oil futures over the last several trading sessions have reached lows not seen since February this year. That has brought jet fuel spot prices in both the New York Harbor (NYH) and USG to levels not seen since 2009.

NYMEX heating oil compared with USG and NYH jet fuel spot prices this year ($/gal)

On the consumer side, fuel costs for US carriers are 32% less year-to-date compared with 2014, according to the US Department of Transportation (DOT). The average price in June, the latest numbers available from the DOT, was $2.05/gal.

Fuel costs for airlines are not only based on the current spot price of crude oil and heating oil, but also on how airlines have hedged their fuel contracts. Some airlines, such as Delta, had hedged their fuel contracts on higher oil prices in 2014 and now are not always able to benefit from the cheaper prices.

Southwest Airlines, on the other hand, announced in July significant expectations for fuel savings in the next fiscal quarter.

“Based on our existing fuel derivative contracts and market prices as of July 20, 2015, we expect significant year-over-year fuel savings again in third quarter 2015,” CEO Gary Kelly said. “With economic fuel costs currently estimated to be approximately $2.20 per gallon, as compared with third quarter 2014’s $2.94 per gallon.”

Southwest paid near the average in June 2014, which was $2.98/gal. Fuel carriers have seen a 30 cents/gal fluctuation in fuel costs so far this year.

US fuel cost for major airlines 2015 ($/gal)

The fluctuation in fuel prices for airlines did not necessarily affect ticket prices for passengers. That did not keep passengers from purchasing tickets, however.

Airlines for America (A4A), the industry’s trade association, estimated that 192m passengers would take flight in the US for summer travel this year, averaging over 2m/day. This is up from 2014’s 184m summer passengers and 2013’s 179m summer passengers.

For the week ended 14 August, jet fuel consumption was up by 23% from last year to 1.772m bbl/day, based on data made available by the Energy of Information Administration (EIA). US jet fuel inventories were up 18% year on year to 42.3m bbl.

It is expected that jet fuel demand will weaken in the winter after summer vacation season tapers off.

However, petroleum analyst Dan Lippe noted on Tuesday that jet fuel prices strengthen during the winter as “refineries reduce jet fuel production in order to boost distillate fuel oil yields; hence jet fuel production declines more in winter than jet fuel demand.”

Based on crude oil prices, Iranian crude exports, OPEC production decisions and global economic variables, Lippe said it is fair this year to ignore all of the “usual” factors for making a call on jet fuel spot prices.

“You have a conundrum for discussion of jet fuel prices this winter,” Lippe said.

“I don’t like to be unduly bearish but when you’re rolling snake eyes or elevens, it’s time to let a new shooter roll and go to the bar for a good stiff drink.”

Focus article by Annalise Little