Jet Fuel Insights: Impacts on European jet fuel market from MidEast and India

Author Argus

This second of four podcast episodes considers how the freight market affects jet fuel prices around the globe.

Over the next few weeks we will be discussing the price implications of three major jet fuel trade routes, Middle East to Europe, Asia-Pacific to the U.S. West coast, and U.S. Gulf coast to Latin America. In this second episode, Louise Burke, Florence Schmit and Sarah Raffoul give you breakdown of the European jet fuel market and the impacts from the Middle Eastern and Indian importers. 


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Transcript

Louise: Hello everyone, and welcome to our podcast miniseries that focuses on key jet fuel trade routes across the globe. In this series, we'll be discussing three major global routes: Middle East and India to Europe, Asia to the U.S. West coast and Latin America, and the U.S. Gulf coast to Latin America. This is in fact our second episode, and we will be discussing the European market and Mideast and India jet trade flows to Europe. This podcast episode is brought to you by Argus Media, which as many of you know, is a leading independent provider of energy and commodity pricing information. My name is Louise Burke and I'm the Vice President of Aviation here at Argus. And with me today is Florence Schmit. Flo is based in London and she's our European jet reporter. And Sarah Raffoul is sitting in Dubai and is our Middle East business reporter. Welcome, Florence and Sarah. Great to have you both here.

Florence: Hi, Louise.

Sarah: Hello, thank you.

Louise: And I thought we would start the discussion. Let's start with you Flo, let's start the discussion by really getting a perspective on Europe in a normal market environment. We know that Europe has rationalized its refineries. In fact, we touched on that briefly in our first episode. But would I be correct in understanding that Europe typically is short of jet fuel? And can you provide an overview of the market in Europe where the jet fuel is imported? Does it have any seasonality, some of those key factors affect the markets in Europe?

Florence: So, as you already rightly said, Europe is a net importer of jet fuel. A lot of its jet fuel requirements is usually imported from markets east of Suez. And just to give you an idea of how much is roughly imported on a yearly basis, and in 2019, we saw roughly 23mn tons of jet fuel being imported into Europe in the whole year. And this compares with roughly 900,000 tons that were exported from Europe to other markets. And the major destinations where that jet fuel would be imported into are the United Kingdom, France, and the Netherlands. So, these three form the three major markets where jet fuel would be imported into.

A lot of the jet fuel requirements that Europe imports come from the UAE, Saudi Arabia, and India. Just to give you an idea in 2019, roughly 5mn tons came from the UAE and 3.8mn tons came from Saudi Arabia. And there's also some requirements that will come from Russia or even South Korea and also sometimes from the United States. There is some type of seasonality in jet fuel imports in Europe where we would usually see during the month of May to September, a uptick in imports for jet fuel typically in line with the summer travel demand season. You know, in the months of June to August, there will be higher requirements for jet in Europe, so we'll also see an uptick there. I mean, we're looking at roughly 2mn tons imported on a monthly basis during these months. But obviously, these things can change depending on if there's maintenance seasons in Europe or elsewhere. So depending on that, imports can also vary, but most of the imports we see usually in Europe would come during the summer months.

Louise: All right, that's really interesting information. But let me ask you this, of course we're in a totally different circumstance right now with the Covid-19 pandemic. And we know that it started to affect markets pretty severely, I think, Europe included, of course. Can you walk us through what's happened since March and do you see a change in the fuel import dynamics or the storage issues as it relates to Europe?

Florence: Sure. So, the beginning of the outbreak in Europe really, it seemed like the impact on jet demand would be minimal. I mean, only flights canceled in Asia or to Asia, specifically. But then as we went along and through March, May, and June, we saw that also a lot of flights were being grounded in Europe, which then related to a lot of jet demand being lost. And people were anticipating that because of this reduced demand environment, there will be less import requirements from markets outside of Europe to import jet fuel. But what we've actually seen is that there had still been a steady inflow of jet fuel imports into Europe during these months of March, April, and May when a lot of the European airlines’ fleets were grounded. And the reason for that was really that the contango in the forward curve, so when the prompt prices are below the forward values, it was so steep that it encouraged traders and market participants to book jet fuel from east of Suez mostly and to ship it to Europe for storage purposes only. And this in turn has resulted in a lot of the storage capacity in northwest Europe and in the Mediterranean really reaching capacity. At some point, I mean, we're looking now at ARA [Amsterdam-Rotterdam-Antwerp area] stocks at roughly 1.3mn tons on 13th of August. That was where it was at its highest. And also resulting in floating storage rising as well, because there was still a lot of product coming in and onshore tanks were filling up, but the product still needed to go somewhere and the demand was simply not there to take in that product really. So, floating storage was also rising and it was at its highest at around 1.4mn tons also during mid-August. It has come down since but what we have seen in this environment is that a lot of jet had been booked for storage purposes mostly.

Louise: Great, thanks, Flo, that's great information. I know normally, we would always hear about crude floating storage. So, it's really interesting to see how this particular situation has created the clean products floating storage generally on a global basis. So, great information. Thank you. I wanted to turn Sarah to you to talk about the incremental supply side of the equation. Flo mentioned, you know, a couple of the key importers into Europe. We know Mideast and India are key for Europe. Can you give us a perspective on who are the majors producers of jet fuel in your region and where they typically sell into?

Sarah: Thank you, Louise. Yes, of course. So, in the Middle East, Saudi Arabia is the largest jet fuel producer, followed by the UAE and Kuwait. And this is according to the latest available data by Jodi. Local domestic refineries in Saudi, which are either owned or partially owned by state-controlled Saudi Aramco, can produce a total of more than about 300,000 b/d of jet. And in the UAE Abu Dhabi state-owned ADNOC which operates more than 900,000 b/d of capacity at Ruwais east and west can produce up to 215,000 b/d of jet fuel, which makes it the largest jet fuel producer in the region. Now, a large part of this output moves to Jebel Ali, which serves as the storage hub for the demand required by Dubai's International Airport which is the main airport in the UAE. and ADNOC's excess supplies typically head to France, the UK, and the Netherlands while Aramco cargoes mainly heads to the UK. And Kuwait, its state-owned KNPC operates both Mina Abdullah and Mina Al-Ahmadi refineries and can produce a total of 130,000 b/d of jet. And its excess supplies typically head to the UAE, the UK, and France. Now, moving to India, Private Sector Refinery Reliance Industry is the largest jet fuel producer there and it operates the 1.36mn b/d Jamnagar Refinery Complex, which is on India's west coast, and Reliance cargoes typically head to the Netherlands, France and the UK because arbitrage economics typically favors shipping west rather than east.

Louise: Okay, that's really interesting. But let me ask you this, of course, in fact, do we see more volumes being shipped? Because we know that with Covid-19 Mideast and India internal domestic jet demand has been affected. We've seen tremendous demand destruction as the flights and airlines have grounded their equipment. Has this caused any shifts in trade flows? Or has it even created additional opportunities? I think I was just hearing that some cargoes from India that normally head to Europe might be heading to the U.S. Could you give us a perspective on how this jet demand destruction in the Middle East and India has maybe provided opportunities either for different destinations or different volumes? Love to hear your perspective.

Sarah: Yes, sure. But let me start off by saying that in the Mideast Gulf, the start of the coronavirus outbreak coincided with a heavy refinery maintenance program. And this was already pre-scheduled for the first and the second quarter of the year. Now, just to put things into context, Argus estimated that in April, 1.27mn b/d of crude refining capacity was offline in the GCC region. And this is about 23pc of the region's total. And given the prevailing market conditions, some refineries had to adjust their jet fuel yields, which resulted in lower jet fuel output. To give you an example, Saudi Arabia, which is the largest producer of jet fuel in the region, recorded a 52pc decline in jet fuel output to 118,000 b/d in the second quarter.

Sarah: As a result, year on year jet fuel exports from the region fell by an average of about 359,000 b/d between January and August. Now, several Mideast Gulf refineries returned from maintenance at the end of the second quarter, and that boosted jet fuel shipments to Europe in May, which was the highest in over a year according to Vortexa. But as Florence mentioned earlier, much of the influx of jet fuel into Europe ended up in onshore or floating storage as demand there weakened. A lack of outlets in Europe resulted in cargoes heading east for much of June throughout August. So, year on year exports to Europe more than halved while exports to Asia-Pacific more than doubled over the last three months. The strength in Asia-Pacific jet fuel prices over values in Europe was another factor. So, outright Singapore jet fuel prices traded at a premium to northwest European jet fuel between June and August while last year it traded at a discount.

Now, moving to India, jet fuel exports fell to a more than five year low in July. And exports are likely to keep falling through October as the domestic refiners maintain low jet fuel production. In August, for example, shipping lists show about 74,000 tons of jet fuel left India ports, but rather than head to Europe, these are heading east instead. Shipping fixtures also show about 95,000 tons of jet fuels, which are chartered to load in September in India are possibly heading to the U.S. Atlantic coast instead of Europe to take advantage of higher prices there. As a matter of fact, a total of 120,000 tons of jet fuel that loaded in India at the end of June and July had European discharge options, but vessels changed destinations midway and discharged their cargoes in the U.S. during August instead. We may be seeing a similar trend in the Mideast Gulf as about 60,000 tons of jet fuel that was loaded in September from the region now has the option to discharge in the U.S. Atlantic coast instead of Europe.

Louise: Great. Thanks, Sarah. That's really interesting. I mean, it clearly shows how tracking freight movements really are key to understanding the market dynamics in each region. So, I know many analysts will look at the freight, they'll look at inventory levels as well and clearly when they're making their decisions about moving product, freight, and looking our jet flow trade map that we have I think will be valuable. So, thank you very much, Flo and Sarah, it's been great talking to you. And if you enjoyed this podcast episode, please be sure to tune in for other episodes in this miniseries. And for more information on Argus global jet fuel coverage, please visit www.argusmedia.com/jet-fuel. Thanks, everyone.

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