Viewpoint: Europe jet fuel supply to remain ample

Europe's jet fuel market will remain well-supplied going into 2019 and demand is likely to grow at a slower rate than in recent years.

The International Air Transport Association (Iata) forecasts global airline fuel use to rise by 3.5pc in 2019, to 368bn litres, after 4.2pc growth it expected for 2018. Global airline fuel spend will increase by 11pc because of the delayed effect of hedging. Iata expects jet fuel prices to decline by around 7pc in 2019 on the year, compared with 28pc and 31pc in 2017 and 2018, respectively.

Switzerland-based bank UBS forecasts jet fuel refining margins in Europe to rise by 14.5pc in 2019 on the year, after a 26.6pc annual rise in 2018.

European jet prices have fallen from four-year highs in October as the fall in the price of crude has led to refiners running their plants hard, so jet fuel production has increased. This is likely to continue, as Opec's assessment on the call on its own crude stands at 31.4mn b/d in 2019, well below the level its members agreed to cut their output to in the first six months of next year.

The IEA forecasts global refinery throughput to exceed refined product demand into 2019. Refinery runs in more economically developed countries in Europe will remain stable in the first quarter of 2019 at 12.13mn b/d, from 12.17mn b/d during the last three months of 2018. European refiners are unlikely to cut runs, despite weak gasoline margins, as lower throughput hits middle distillates. Heavy refinery maintenance in October and early November in Europe pushed average jet-fuel cracks to North Sea Dated crude so far in the fourth quarter to their highest since the same quarter in 2014.

The IEA forecasts global refinery crude throughput to fall to around 82.5mn b/d in first quarter of 2019 from 82.7mn b/d in the fourth quarter. Other factors indicate a bearish start to 2019 for the jet fuel market.

Mild weather in northeast Asia has reduced demand for kerosine for heating, and firms in the region stocked early this season to avoid a repeat of the winter of 2017-18 when refineries were unprepared for unusually cold weather. This means the refining pool can swing back to producing jet fuel, making more available for export to northwest Europe. Long-range weather forecasts suggest mild weather could remain until February, which would ensure continued jet fuel exports.
Some additional refinery capacity coming online might add to global supply. Azerbaijan state-owned Socar's 200,000 b/d Star refinery in Turkey will reach full capacity at the beginning of 2019, although much of this will supply Istanbul's new airport. China's state-controlled PetroChina expanded jet fuel capacity at its 74,000 b/d Qingyang refinery in northwest China's Gansu province in early December, which could supply more jet fuel to Qingyang airport. PetroChina expects to raise its jet fuel-producing capacity early next year.

Higher-than-demand capacity growth has prompted jet fuel producers to increase exports of the fuel to overseas markets.

Refineries in Turkey, India and Brazil will return from end-year maintenance. The crude distillation unit at Petrobras' 415,000 b/d Paulinia refinery (Replan) will restart in February 2019, following an explosion in August. In recent months, this outage has redirected a number of cargoes transatlantic that were originally destined for northwest Europe from east of Suez.

Some Mideast Gulf supply is coming on stream. Kuwait's state-owned KPC will reach on-specification output from its clean fuels project at the 265,000 b/d Mina Abdallah and 440,000 b/d Mina al-Ahmadi refineries during the first half of next year. State-owned Saudi Aramco has its 400,000 b/d Jizan refinery scheduled to ramp up to capacity in the first half of 2019, although it will mainly produce gasoil and fuel oil.

Balancing the expected ample supply would require lower production from the US Gulf coast, which could occur in February during maintenance. The IEA forecasts crude throughput in the Americas to fall to 18.7mn b/d in February from 19.4mn b/d in January and an average of the latter level during the fourth quarter of this year.

Maintenance elsewhere is in line with seasonal patterns — Saudi Arabia's 400,000 b/d Yanbu refinery could see a turnaround in March to April.

Although jet supply will likely remain ample, some factors could tighten the excess. UBS forecasts the upcoming International Maritime Organisation (IMO) marine sulphur regulation will push jet margins at European refineries below those of diesel in 2019, after they were more profitable for most of this year. The IMO global cap on marine sulphur emissions from 1 January 2020 could increase diesel demand for mixing with low-sulphur fuel oil (LSFO), which will eat into jet fuel production. This could prompt European refiners to maximise diesel over jet and would reduce availability. There is uncertainty over how refiners will tackle the IMO regulation, and there may be stronger demand for fuel oil that could be repurposed.

Additionally, the global crude slate has become slightly lighter because Opec production cuts largely include medium and heavy crudes, and there has been increased US production of light, sweet crude. This change has reduced refining optimisation for supplying middle distillates.

Demand for jet fuel is likely to rise, but at a slower rate than the above-trend growth in recent years, and with some underlying uncertainty about trade policies and geopolitical tensions contributing to a mixed economic backdrop. Rising fuel prices, which make up around 30pc of an airline's operating expenses, will reduce the demand incentive when passed onto customers, as fuel hedges at relatively low prices start to mature.

Ratings agency Moody's forecasts airports in continental Europe to report average traffic growth of around 3-5pc in 2019, from 4-6pc in 2018. It expects UK airports to exhibit weaker passenger growth compared with airports in continental Europe as Brexit results in a more subdued UK macroeconomic environment.