Aviation fuel market turbulence: Market update

Author Argus

Join us with our partner Refinitiv for an update on the aviation fuel market.

Listen in as Louise Burke, Argus Global Head of Aviation and Jim Mitchell, Head of Americas Oil Analysts and Carl Larry, Performance Director at Refinitiv discuss what aviation fuel supply and demand is doing and what the outlook is. 

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On-demand webinar – Aviation fuel market turbulence | Covid-19 and OPEC+ impacts


Carl: Hello, welcome to our podcast. Today, Argus and Refinitiv are partnering up to provide an update on the North American aviation market. I'm Carl Larry, Performance Director at Refinitiv, and here with me today is Louise Burke, Global Head of Aviation at Argus and Jim Mitchell, head of American Oil Analysts. We had a webcast earlier, a couple of weeks ago talking about supply-demand, obviously, all the things that are going on in the world right now with the COVID-19 situation. So, I guess we can start there, Louise, Jim, how about we talk a little bit about global jet fuel demand and demand destruction? Sort of like, what are we seeing in demand right now?
Louise: Okay, great. Thank you, Carl. We continue to see jet fuel markets pressured lower. Pandemic is still here. It's reduced jet demand to really unprecedented low levels with the massive reduction in passenger flights that we've seen. So what we've seen additionally to this demand destruction is a real severe pressure on refining margins, in fact, down to multi-year lows. And in some areas, they have turned negative for the first time on record. So we saw...I'm specifically talking about the month of April and, in fact, for those of you following the crude market, we saw a negative crude settlement which was also unprecedented. So we did see discounts of the jet fuel cracks to crude at various points in the month. And we assume that this impact is continuing for second quarter, we're in the second quarter now, so April and May, before we see a gradual return to flying in the second half of the year. So jet cracks this year will remain well below levels of recent years.
Some good news in Asia, for example, in China, we see jet fuel demand starting to recover. If you recall Wuhan, which is in the province of Hebei went on lockdown Jan 23rd. It now has had all travel restrictions lifted, I think it was the second week in April. And as a result, we did see a recovery in air traffic in China. At the peak of China's lockdown, the load factor, which is the ratio of passenger-kilometers traveled to seat-kilometers available, dropped 40%. It has now recovered to 60%. So, that's according to IATA data that they maintain. Most of that has been business travel that counted for much of the recovery, and leisure travel is really yet to bounce back.
In Europe, when we look at Europe and the U.S., we see, again, jet fuel, cargo margins falling below crude, continue to press demand for air travel in the region. And in fact, the largest absolute month on month following jet cracks was in the Mediterranean because we saw in March jet fuel demand was down. In the center of the pandemic, which was Italy, it was down by 66%. In the U.S. we've actually started...we hope to see the bottom for jet demand. The last two weeks have seen a trend upwards. Total U.S. traveler throughput, which is measured by transportation security administration statistics, in April did clearly show a drop of 95% of demand. We saw in April of 2019, 70 million passengers pass through the airports. In April 2020, we saw three million. But we've started to see numbers rise. And the TSA numbers, for the first part of May, we've seen an early recovery. So we do look at that as an easing, if you will, of some of the jet demand numbers that we've seen for March and April.
Carl: That's great. So, hey, Jim. So I know you watch flows a lot, you know, trading flows. We see a lot of that action. What are those flows telling you about demand and demand destruction right now?
Jim: Well, you know, Carl as a former trader, I look at and look for market dysfunction. And I talked about that quite a bit when we talked almost exactly a month ago, April 9th. Things were pretty bad around then. They've had a peak, i.e, the jet crack got better and now it's settled into more sustainable range. To give you some perspective, I look at the Gulf coast and I look at three different grades and how they process through the refining system in different places. So I look at WTI in Houston, I look at Eagle Ford in Corpus Christi, and I look at WCS in the Houston market. The crack for jet in Houston has bounced to around positive for the last couple of days. The jet crack using Eagle Ford in Corpus is slightly negative. And the jet crack for WCS in Houston is positive and always has been positive.
Carl: Great. So, yeah, truly interesting stuff here. So we just keep going more, you know, past this demand. What about supply? Let's look on the other side of this thing. So what's happening to jet fuel supply? What do you see in inventory levels? Where's product moving? Louise, you know, let's start with you again. You mentioned something about EIA to me not too long ago. What can you tell me about this demand and about this supply right now?
Louise: I wanted to basically start overall with sort of the global look and then we can drill down into the U.S. numbers. Starting again with China, we did see a recovery of refinery-run levels. And I think this is an important indicator, if you will, for overall supply because supply is a function of production and inventory. So with China recovery on the way and refinery runs moving up, we saw lower levels in February. And now we see March refinery-run levels at 11 million barrels a day, in April 12 million. So we could see new stresses on the market as this product supply grows more quickly than the local market can absorb and that's gonna contribute to surplus exports. Just some background, in 2019, we saw refiners in China increase their jet fuel production because they had tax incentives. And so they basically added hydrotreaters and as a result, we see additional Chinese jet available. And of course, South Korea, of course, is a major export and moves into the North American region.
In the U.S., some really interesting phenomenon have been happening. So again, looking at EIA data. On the East Coast, we saw jet fuel production fall to negative levels for the first time in 20 years last week, we're looking at week ending April 24th. And this was because refiners converted unwanted jet fuel to higher-margin products. We know when we look at the crack spreads that diesel is really the strongest product right now. Gasoline and jet have been tremendously hit simply because no one's traveling. And so what we saw for the EIA data that there was negative 5,000 barrels a day of jet production that was taken off the U.S. East Coast levels. And this is the first negative level since EIA has been tracking the data since 1990.
A negative production basically means jet fuel was repurposed as feedstock and blended in with diesel, which is again, as we talked about, the highest margin product. We even saw the same thing happen with Delta Airlines who owns a refinery. They bought the Trainer Refinery in 2012. It's 185,000 barrel a day refinery. And we saw that the throughput has been reduced, of course, like all other refiners. But basically, all of its jet fuel production has been blended into diesel versus the jet itself. Inventory levels, again, are lower for that reason. And we can see jet demand moving up slightly. So we do see a recovery in those levels through the EIA data as well.
Carl: Great. So, Jim, when we talked about this, we talked about demand, you know, and obviously a very big deal when it comes to trading, but obviously the other side of that coin is supply. What's your take on jet fuel supply?
Jim: That's a great question. So the three major exporters in the world, as Louise mentioned, South Korea, China, and the U.S. Prior to February 1st, the market was pretty established and the market share of each of these big participants was pretty established. In February, it marked a demarcation point for all three of them. All three of these exporters, South Korea, China, and U.S. increased their production of jet to a lesser extent in the U.S. March then was another step higher, especially for South Korea and China. And April was even higher for these two. For South Korea, it was less for China, about half of what their production was prior to January. And in the U.S., it was about a quarter of the production prior to the February 1st.
Let’s take a look at the export destinations of some of these big exporters. Market share basically maintained its customer base with some peculiar twists. For example, South Korea sent jet fuel to Malta for the first time in a long time. They also sent jet fuel to Panama. And that Panama market is a battleground to ensure the U.S. owning the Caribbean side and South Korea and China battling over the Pacific side. South Korea was a big supplier to the Panama market in February and March. Massive jump into the Singapore market, also a bigger jump into some of the other markets like Togo. I wasn't even aware that Togo could take this much jet, but they did.
And also Singapore, South Korea started to find other holes, other storage facilities like the Solomon Islands. They did lose some of their bigger customers, the UK being one, the U.S. being by far the biggest one with imports from South Korea down about 75%. Heading over to China, a very similar story. They lost some of the volume from their bigger customers, but they also found other places to store jet, like the Netherlands, which was particular strange. They upped their game in the Singapore market in a big, big way and also lost the U.S. as a customer. The U.S., on the other hand, maintained its market in the Caribbean with obviously lesser volumes. The biggest dip, of course, being Mexico. And that was roughly 75% dip in volumes. But in one particularly weird twist of fate, the U.S. actually exported jet fuel back to South Korea from Alaska, from Honolulu, and from California.
Carl: Great. So, you know, obviously, we have this picture of what's happened or what's happening. I recently spoke with somebody at one of the higher-ups at one of the major airlines. He said that right now they're between 5% and 8% of airline capacity. And, you know, he's just not really sure where or how it comes back. So taking that in context, what do we think about looking forward? What do we think this is gonna look like? How long do we think it's gonna take before we see some kind of recovery back in jet fuel? And how long or what steps would that need to take to go back to normal? Louise, you wanna kick this one off again?
Sure. That's a very challenging question, Carl. And I think there's many economists and analysts that are reviewing this issue. And what's really challenging is the unknown part. It's an unknown virus, very incomplete information. So really challenging to forecast. But the majority of the analyst and folks that are looking at this, including our consulting team, has felt that the recovery will be a U-shaped recovery. We do hear that it could be a V-shape, the U-shaped, or a W-shape. And so, at this point, we said that the lowest demand levels are happening now as lockdowns continue. We see economic activity beginning to recover in the third quarter and an acceleration of growth again into the fourth quarter into 2021 and then a potential recovery by the end of 2022. But the risk is that we could have a secondary spike, which leads to this W-factor because industries open too quickly. So I think the recovery in China, for example, has been dramatic, but we could, in fact, see another lockdown and how in the longer term will that affect the business.
In terms of jet travel, the issue is really if GDP growth doesn't increase and we don't see a substantial bounce back, we will see a limit on travel. And so, if you wanted to put some real figures on it, our consulting team looked at overall global demand for 2019 versus 2020. We know jet demand is 7.5 million barrels a day, 2019. And estimates for 2020 are 5.3 million barrels a day. But clearly not at the levels where jet demand once was. I think the issue with airlines as they initiate recovery is that they have to review issues like passenger exposure, liability issues, timetables for resuming flights, travel costs will go up because of extensive and frequent plane cleaning, testing, etc. So all of these factors have to be taken into account as we see this gradual recovery happening in the market.
Carl: Yeah, that's great, Louise. And I think that's the one thing right now that we can...at least if we have a forecast, that nobody knows what can happen because this has never happened. So I'm going to put that onus on you now, Jim. What's your take on how long it's gonna take to recover?
Jim: Yeah, so we looked at three different events. We looked at U.S. passenger domestic enplanements, and enplanement being literally a passenger getting on a plane, and the plane taking off. So the three events that we looked at was 9/11, the start of the Iraq War, and then The Great Recession starting in 2008. So starting with 9/11, obviously that was an airplane-related event. The demand dropped precipitously, similar to what we experience now. It took about a year and a half to get back to the same level of enplanements that we were at prior to 9/11. 
That coincided with the start of the Iraq War, which is a little bit different kind of demand destruction. But that took about a year to get back to the same level of enplanements. And then The Great Recession in 2008, that was, again, a different kind of demand destruction. We suspect that the types of demand destruction between these three events, it's some combination that we're experiencing now. But back to this, in 2008, the demand destruction, it took about a year for it to happen, but then it took around seven and a half years to get back to the same level of enplanement that we were prior to the start of The Great Recession.
Carl: Great. Yeah. So really, really great insight. Thank you, Louise and Jim. Thank you for everybody else who's listening. And for further information, please, on U.S. refined products including jet fuel, check out Argus US Products, and Argus Jet at argusmedia.com. And to learn more about Refinitiv, please visit refinitiv.com. Thank you again, all, for listening. We'll check in again with you soon.

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