Jet Fuel Insights: The weight of freight on global jet fuel prices

Author Argus

This first 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 to the U.S. West coast, and U.S. Gulf coast to Latin America. In this first episode, Louise Burke and Alex Younevitch give you a global breakdown of jet fuel prices and how they are responding to the changing freight market.

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Transcript

Louise: Hello, everyone, and welcome to our jet fuel trade route discussions. So in this series we will be talking about some of the key trade routes across the globe and we'll be discussing three of the main trade flows, the Middle East to Europe, Asia to the U.S. West coast, and U.S. Gulf coast to Latin America. This podcast episode is brought to you by Argus Media which many of you may already know. We are a leading independent provider of energy and commodity pricing information. My name is Louise Burke. I'm the Vice President of Aviation here at Argus and with me today is Alex Younevitch, the Global Head of Argus Freight. Hi, Alex.

Alex: Hello, Louise. Thanks for having me.

Louise: We're excited to hear your insights. So let me just kick it off and ask you to give us some perspective. We know that we have global trade flows. We have key regional prices for jet, Singapore, Northwest Europe and Gulf coast that are affected by these trade flows. So could you comment on the general freight flows and how they may impact on this market?

Alex: Sure, that would be my pleasure. Well, you know, we do live in a scary and uncertain world right now and this reflects on the commodities and the freight markets which includes jet, of course, and its transportation in tankers. So I think it's worth mentioning straight away that Argus is now producing a weekly infographic map highlighting prime trade routes for jet which combines the prices for jet fuel, the key prices that you mentioned, and the clean tanker freight on the respective arbitrages. And it's free, which is always great, and we encourage listeners to check it out by following the link in the description or by contacting Argus. And the reason why we're doing this, of course, just as you mentioned, is because the freight rates and the commodity prices, including jet, has a great synergy between each other and the arbitrages are affected by both of those forces.

Louise: Great. Looking forward to it. I've seen the original map and I think that its weekly updates are really going to provide some really good information for leading price signals for the marketplace. So let's talk about some of the specific regions. How about Europe? We know that in Europe that we've seen some, over the years, rationalization of refineries and we're in the middle of a crisis with Covid-19 and we think that this may actually present more...it is presenting more challenges for some of our older and simpler refineries. We know jet fuel's imported from the Middle East and Asia. Can you comment on tanker traffic into Europe related to those regions?

Alex: Of course. Well, in terms of the traffic or the vessels coming in, it is, let's say, a usual breakdown which largely depends on the origin of the cargo. And the biggest volume is carried by long-range one and long-range two tankers which typically carry cargos of 65,000 tons and 90,000 tons respectively. And the overwhelming majority of long-range tankers bringing cargos to Europe come from the Middle East. And there's no real surprise there still as European refineries are rationalizing, like you said. The refining capacity in the Middle East is only expanding. And when it comes to medium range tankers which carry another big load of jet to Europe and usually it's around 37,000 to 38,000-ton cargos. Now those flows are relatively even between coming from the Middle East, U.S. Gulf, Northwest Europe and Mediterranean.

Now in terms of volumes, I'm afraid we haven't seen an actual uptick of jet imports to Europe yet despite the rationalization of refineries. In fact, according to data from Vortexa...and I’ll actually look at the screen right now. The jet flows to Europe so far in August have ticked down from July and June levels. And it is actually by a considerable amount. So we're down from around 1.3 million tons in July to around 820,000 tons in August. And that's probably around 35pc, 37pc drop. So that actually makes me wonder what is happening on the demand side here. So actually it would be nice if you provided some, you know, much needed light on that.

Louise: Yeah, it's a really interesting situation, Alex. And so, of course, not only tanker rates and product movement affect jet but what refineries essentially do with their refinery maintenance and turnarounds do as well. So in the spring we actually saw a lot of product movement going into Europe in March and April even with the tremendous demand destruction. So we saw inventories fill up very quickly and then in the summer months we actually did see some resurgence of jet fuel demand, primarily based on leisure travel, not business travel. But now we're seeing as we move into the late summer and fall that in fact those numbers are estimated by a number of organizations, including ourselves, to continue to move downwards because business travel is not picking up, and of course, your summer vacation seasons are starting to end.

So I think that may account for some of those changes in demand and in your imports into Europe simply because of the demand destruction that we've already had and likely to continue for the rest of the year.

Alex: Yeah. I'm counting my frequent flyer miles and I'm not liking what I'm seeing.

Louise: Don't worry. Next year we expect a much more rosier picture.

Alex: Let's hope.

Louise: Can you comment on how freight rates and freight movements may happen, for example going to U.S. West Coast and Latin America. Do you see a lot of tanker flows moving in that direction?

Alex: Yes. Indeed, there is a strong flow of jet coming to Americas from the far east, mostly we're talking South Korea, much less Japan. And most of it went in West Coast of North America. There is a little bit coming further through the Panama Canal to the Atlantic side, but considerably smaller amount. Now most of the Asian product that reaches the Americas comes on MR tonnage. And there is some coming on L01s but considerably less. And actually, when it comes to crossing the canal, for example, it's not an issue because it can accommodate both vessel sizes. So if on occasion, we do have a vessel crossing to the side, there is no real need for lightering before and after for those few Asian product cargos that make their way to the Atlantic coast of Americas. On Mexico's west coast, for example, you do see a lot of multiple discharges because of draft limitations of storage capacity constraints at the major ports there. And over time, you'll have a medium range tanker make three or four stops along Mexico Pacific coast before completing discharging. And this may happen on west coast of Central America as well. But again, this is less of like, you know, trend, the majority just goes to the U.S. West Coast. And the funny part about that is when you think about how the flows work or how the vessels go on the arbitrages, is that ship owners not necessarily when they have their vessels arrive to the U.S. West Coast would immediately ballast their vessels back to Asia, or sometimes have them actually going to Mexico or going to load reposition and maybe load the cargo in U.S. Gulf Coast. And for example, if it's a repositioning play, then you might even have considerably lower freight rates for those vessels below the market, just so you know, the vessels just want the business to reposition and engage a different market, which maybe they find to be more appealing at the time.

Louise: So, you know, good points that you made there. I'm just curious to hear overall as you look at the main fundamental factors that affect freight, you know, is it weather? We had just a Hurricane Laura. Are there other factors that you think are key to...that do impact on freight prices, freight movements? Can you just give us your sort of top down approach on that?

Alex: I think it's fair to say that...and that's probably not a very good opinion for, like us, who like to see, you know, deep into the numbers and to the supply and demand fundamentals and so on. But really what we keep saying in this uncertain world of ours, especially in 2020 is that geopolitics often rule the day here so...or like unusual, let's call them force major events, like Covid-19. So that's what creates the massive spikes and ups and downs in freight. Something that shifts the fundamentals drastically without any healthy processes behind that.

So I'd say that nothing can affect the freight rates just as commodity prices, by the way, more than, you know, sudden geopolitical events. Now in terms of when it does come to fundamentals, the prime factors are still the shifts in supply and demand. For demand, that, again, is very much tied into the commodity prices. So in terms of whether a certain arbitrages are open or not. And the reason why I'm talking arbitrages is because tanker demand is actually not as simple as just the volume of cargo which needs to be transported. It's something that's called ton mile demand which means, you know, the cargo volume multiplied by distance. So the longer is the distance between the buyer and the seller, the better it is for the demand for tankers because that vessel performing the voyage is out of the market for a longer period of time.

And long-haul arbitrage is like, for example, long-range jet and cargos coming from the Middle East to Europe are very good for the demand or again, medium range tankers on transatlantic voyages, so transpacific voyages. Again, good things for the tanker demand.

Now when it comes to supply, I'd say that long-term or at least mid-term there is an oversupply of vessels still in the clean tanker market which means too many vessels for the amount of demand we have, especially with the demand destruction. So we shouldn't see any considerable spikes in freight unless there is, God forbid, another wave of Covid or another geopolitical event to go with it.

Louise: Okay, great. Really interesting. And Hurricane Laura, can you just give us a perspective on what you thought that impact was? I know it was a very fast-moving hurricane, did have big impact on the Gulf coast but I'd love to hear your view on that.

Alex: Sure. Well, you know, any such event like disruptions due to weather generally are good for shippers because it either increases the short-term chartering demand as people want to stock up on certain things. Like we've seen due to Hurricane Laura there was, you know, a boost to the transatlantic MR rates which...and considerable boost where we had, for example, the U.K. Continent to U.S. Atlantic Coast rising by about 50pc. And this was due to people just rushing in with the gasoline cargos, and of course, if you have the MR rates rising due to any commodity movement, it affects other products as well like jet, diesel and so on. But this is a short-lived fact because, again, the ports are already opening after the Hurricane Laura and we already see this effect on the rates. So now that we see that there is no lasting impact, charter has held back some of the cargo to let the market cool off and now the rates are going back to their, let's say, healthy levels again or something which is more due to normal demand and supply balance.

Louise: Yeah, and really interesting. And you can clearly see that the...as you said, weather and geopolitics, all of these are key for understanding what impacts on the freight market. Just a final question now, kind of shifting gears from the conventional fossil fuels to the renewable fuels. And so we've started to see increasing trade and renewable fuels as the appetite to produce clean energy by corporations and governments continues as climate change initiatives continue. Can you provide a perspective on how this product is shipped? I'm really curious on how does it differ between clean product tankers and renewable fuels like vegetable oil.

Alex: Sure. When it comes to things like vegetable oils...so we're talking here farm oils, soybean oil, used cooking oil. It...those things usually need to be transported on IMO2 class tankers. There are three main classes there, IMO1, IMO2 and IMO3, and IMO1 is usually reserved for some extremely dangerous cargos. So like industrial chemicals or acids which can eat through pretty much anything. And when it comes to vegetable oil which is moderately hazardous, it can be carried on IMO2 tankers. And a lot of this is on chemical tankers which are smaller than normal clean petroleum product trade tankers which carry CPP products, clean petroleum products. But some of that business is also carried on normal clean tankers because they do have that IMO2 standard. And when it comes to that trade, then it's slightly different from the normal clean product trade because of the nature of the cargo. So let's say it's considered by the market to be a dirtier cargo. So if you have vegetable oil as your last cargo on a tanker, you would have to do some, you know, proper washing after it because it can contaminate let's say your next gasoline cargo after that. So if you have this as your last cargo history, you likely need to have it...to give a discount to the charterer to be competitive against other ships which have their last cargo history to be let's say gasoline or jet for instance.

And similarly, if you want the ship owner to transport a cargo like vegetable oil, then you likely to have to pay him a little premium because of that potential opportunity loss or loss of freight of the few Worldscale points that the ship owner will have to incur after he comes back from that voyage. So in that respect, the dynamics for carrying vegetable oil are different. But again, worth noting here that it depends on how strong the freight market is, right. So if it's a strong freight market and the ship owners are in the driving seat, then you might see those premiums be considerably higher, right. So it comes from a few Worldscale points to, you know, more, like let's say 5, 10, depending on how strong it is. But in the very weak freight market, sometimes you might not get a premium at all or get a very small one which doesn't really change much, right. So it, again, comes down to negotiating power.

Louise: Yeah, that's really interesting, and of course, we know that renewable fuels are definitely the way of the future, and maybe these costs will come down longer term. But thanks, Alex, for your great insights. I certainly appreciated it. I learned a lot. And if you enjoyed this podcast episode, please be sure to tune in for the other episodes in this miniseries. And for more information on the Argus global jet fuel coverage please visit argusmedia.com/jet-fuel. Thank you.

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