Viewpoint: Weak jet fuel fundamentals could continue
Houston, 27 December (Argus) — Jet fuel prices at the New York Harbor could react in coming weeks to an expected drop in demand.
The US jet fuel forward curve is in a steep backwardation, with the forward curve spread averaging as much as 2¢/USG decline per cycle in recent weeks for the Colonial pipeline, and a 0.5¢/USG decline every five days for barge and Buckeye pipeline material.
The forward curve was flat at the end of December 2016.
Demand for jet fuel is expected to drop after the 21-day winter peak travel period, which runs from 15 December to 4 January, comes to an end. Demand for jet fuel typically increases from November to January.
At the US Gulf coast, the jet fuel forward curve also has a backwardated structure, falling about 0.2¢/USG between the prompt cycle 1 and the next cycle 2, and another 0.1¢/USG for each cycle after.
Similarly, the jet fuel forward structure during the same time in 2016 was mostly flat.
New York Harbor jet fuel prices have been stronger during the first two weeks of December, averaging about $1.90585/USG, up from $1.5004/USG in the same two weeks of last year.
Prices have been stronger year over year in part due to a stronger Nymex, averaging about $1.9298/USG during December of this year, up from $1.6617/USG in December 2016.
Prices were also driven higher by the hurricanes earlier in the year that whittled down supply.
Inventories of jet fuel along the east coast now stand at 9.3mn bl for the week ended 15 December, falling by 62,000 bl from the previous week. Inventories at the US Atlantic coast are down year over year by 2.8mn bl.
Inventories have been falling since August and September, after hurricanes Harvey and Irma made landfall along the US Texas Gulf and the Florida coasts, damaging many Gulf coast refiners and further reducing production.
Both hurricanes Harvey and Irma restricted pipeline flow, sending less supply to the lower Atlantic region. The hurricanes also impacted imports that would typically arrive at the central Atlantic region, and feeding refiners in the central to upper Atlantic region.
Inventories fell to 8.165mn bl for the week that ended 1 December, also driven by increased demand that is typically seen during the peak winter travel months.
Despite the sharp backwardation in the jet fuel forward curve, some market sources are expecting inventories to decline more because of stronger demand and lift prices later in the first quarter.
Jet fuel demand rose by 32pc to 2.1mn b/d last week. The volume of passengers flying on US airlines during the holiday travel period this year is expected to rise by 3.5pc over last year. Volumes are expected to be higher this year amid lower air fares and expanded route options.