Demand supports 2022 Mideast jet, gasoil term premiums

Mideast Gulf refiners have concluded term jet fuel and gasoil tenders for 2022 at higher differentials to spot prices than this year on expectations that demand for both products will continue to strengthen next year. The deals were struck just days before the news of the new Omicron Covid-19 emerged, but levels continue to hold firm so far.

Bahrain's state-owned Bapco agreed a $1.30/bl and $1.70/bl premium to Mideast Gulf spot assessment for its ultra-low sulphur diesel (ULSD) and jet fuel 2022 term contracts, respectively, market sources said. This is up from premiums of $0.90/bl for both for 2021, and $1.40/bl and $1.50/bl respectively for 2020.

Kuwait's state-owned KPC concluded its jet fuel term deals for 2022 at a $1.60/bl premium to Mideast Gulf spot assessments, higher than the $0.70/bl and $1.35/bl premiums for 2021 and 2020 contracts, respectively. It is also offering term supplies of 10ppm sulphur gasoil for next year, at a $1.40/bl premium to Mideast Gulf spot assessments, up from $0.70/bl in 2021. KPC only began offering 10ppm sulphur gasoil, first on the spot market, in December 2019 after a new diesel production unit was brought on line at its 440,000 b/d Mina al-Ahmadi refinery.

Abu Dhabi's state-owned Adnoc, which typically used to sell its middle distillate products through term tenders, has shifted to selling through the spot market on a cfr basis since the second half of this year, according to market players. This follows the launch of its oil products trading joint venture, Adnoc Global Trading last December. Adnoc last sold term supplies of ULSD and jet fuel for the first half of this year, awarding the gasoil portion at a $0.45/bl premium to Mideast Gulf spot assessments in the first quarter and a $0.95/bl premium in the second quarter. It sold the jet fuel portion at an average premium of $0.70-0.75/bl for both quarters.

Jet fuel term premiums surpass pre-Covid levels

Bapco and KPC last week concluded their jet fuel 2022 term contracts at higher premiums than for 2020, because demand for air travel, in the Middle East and globally, was showing signs of recovery. Mideast Gulf refiners typically conclude their term contract negotiations in the fourth quarter of the preceding year.

But despite the ramp up in flights, market participants said that demand is unlikely to fully return to pre-pandemic levels before 2023.

This suggests that the higher premiums are supply-driven, rather than demand-driven, as jet fuel supplies have tightened on the back of lower refinery output. Regional refiners have reduced jet fuel yields in response to lower demand since the onset of the pandemic.

Bahrain's jet fuel output remains low, producing 38,500 b/d during January-September this year. That is down 26pc versus the same period last year and 40pc versus the same period in 2019, according to figures from the Joint Organization Data Initiative (Jodi). Gasoil output, on the other hand, rose by 3pc to 82,400 b/d compared with 2020 and 2019.

In Kuwait, jet fuel production averaged 131,000 b/d in January-August this year, down by 7pc from 140,200 b/d in 2019. Gasoil production rose by 9pc to 182,300 b/d from 167,4000 b/d in 2019. Monthly data for 2020 is not fully available on Jodi.

Given the persistently weak Asian regrade — the jet fuel swaps premium/discount to gasoil swaps — refineries have continued to reduce jet fuel production by maximizing gasoil, thereby tightening supplies in the region, according to market participants.

Meanwhile, regional and global air travel demand has begun to pick up, particularly as the US started easing its travel restrictions in October. While "demand is skyrocketing, supply is not keeping pace", Puma Energy said at the International Air Transport Association (Iata) aviation fuel forum in late November. The global market is now "potentially facing a shortage", Iata director-general Willie Walsh added.

Consequently, this has supported differentials, with the jet fuel premium to Mideast Gulf spot assessments averaging about $1.02/bl in 2021 to date, up by 62pc compared with last year. But it is still down by 26pc on 2019. Meanwhile, 10ppm sulphur gasoil premiums have increased by more than 20pc to $1.04/bl over the same period, but remain 12pc lower than 2019 levels.

Renewed uncertainty over new variant

The term premiums were concluded last week, just before the discovery of the new Omicron variant of Covid-19 in southern Africa. As a precautionary measure, travel restrictions have been reinstated in many countries around the globe, which could once again hit the recovery in demand for jet fuel.

But these restrictions are yet to be fully felt in the Mideast Gulf middle distillates market, with assessed jet fuel and ULSD differentials holding firm at $1.50/bl and $1.40/bl, respectively, as of 1 December, roughly level with a week ago. Efforts will probably be made to keep jet fuel supplies to the minimum in the region. Crude runs may be reduced at refineries, and blending of jet into the diesel pool will continue.

By Sarah Raffoul