Europe jet fuel market bearish on abundant supply, unfazed by Middle East tensions

LONDON(ICIS)–Fundamentals in the European spot jet kerosene market have been bearish this week, with availability broadly outpacing demand amid a seasonal low in demand.

There were many more offers for the material in the last two weeks than bids, with only limited trades concluded as sellers were unable to find buyers.

In the short-term, tensions in the Middle East are unlikely to affect the jet fuel market, according to analysts at travel industry data and analytics provider Cirium.

EUROPE WEAK PRICES
By 10 January, prices had dropped by 4% week on week while on a weekly average basis jet fuel values were down by 2-3% compared to the week prior, amid waning demand interest.

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In fact, some trades involved a major downstream consumer selling excess volumes, indicating length in the market.

The impact has been further compounded by spiking Brent crude futures, which jumped close to $70/bbl mark earlier in the week before falling close to $65/bbl.

Differentials to ICE gasoil futures for barges remained low, at May 2019 levels, while cargo differentials were largely static in this week – both still staying well below the two-year average.

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Sources cited growing geopolitical tensions and waning macroeconomic indicators pulling down the market sentiments while inducing greater uncertainty.

A major consumer mentioned that most of the flight operators are avoiding Baghdad airport due to ongoing US-Iran tensions, leading to rerouting of flights and increase in fuel consumption rates, impacting margins.

AVOIDING IRAQ AIR SPACE
According to Cirium, airlines operating between Asia and Europe are rapidly adjusting their flight paths to avoid the Iranian and Iraqi airspaces.

Cirium is part of Reed Business Information (RBI), which is also ICIS’ parent company.

The move follows tensions between Iran and the US forces in Iraq and the crash by Iran of an Ukrainian International Airlines Boeing 737 after take-off from Tehran.

Moreover, the US Federal Aviation Administration has banned US carriers and pilots from using Iranian and Iraqi airspace, as well as some parts of the Persian Gulf, citing the “potential for miscalculation or misidentification” for civilian aircraft in the region.

Another industry expert, however, countered that prices are gradually becoming less sensitive to such developments. For instance, the Saudi attacks in September, which curtailed 5% of the world’s oil production and pushed crude prices up, failed to sustain however prices those high levels for longer.

JET PRICES UNFAZED BY MIDDLE EAST TENSIONS
According to Michael Lapson, Senior Valuation Analyst at Cirium, the impact on overall demand for jet fuel should be very small relative to the total global demand for jet fuel, because most of the world’s flights are not flying over Iraq or Iran.

“I would doubt that the impact on jet fuel price could be as significant as other factors, for example the IMO 2020 mandate, which ICIS has predicted will have a small impact on jet fuel prices over the next few years,” said Lapson.

“Any additional fuel burned to temporarily fly around these two countries could be offset by the fuel not burned by cancelled flights if all flights to/from Baghdad are in fact cancelled.”

Lapson specified that airlines often end up flying sub-optimal routes for political reasons and due to international conflicts.

Aside from international political tensions, there is a related issue of navigation fees.

“Each country charges navigation fees to foreign airlines flying through their airspace, with some countries charging lower fees and others charging higher fees,” Lapson said.

Aside from the cost of burning extra fuel, airlines also have to consider passenger dissatisfaction with longer flight times and whether the delay could cause any passengers to miss a connecting flight.

Airlines could raise ticket prices to pass through the increased fuel costs, but they have many other strategies they could use to reduce fuel consumption and avoid a rise in travelling costs, the analyst added.

One of those strategies could be swapping in a more fuel-efficient aircraft that is either smaller, newer, or both.

Looking ahead, jet fuel demand is expected to remain subdued amid a seasonal lull, coupled with growing crude volatility and increasing geopolitical tensions.

Consumption should pick up late in the first quarter as the second-quarter holidays breaks aproach.

Front page picture: Entrade to the Baghdad international airport 
Source: Murtaja Lateef/EPA-EFE/Shutterstock

Focus article by Shruti Salwan