Recovering US jet demand to help 3Q margins

Rising US jet fuel consumption will ease fuel margin headwinds as refiners seek to ramp up third quarter production.

Global efforts to contain the Covid-19 pandemic have stifled air travel demand. Unused jet fuel flowing into storage has bloated US distillate inventories, but major carriers say added flights will outpace plane ticket sales as they woo travelers back to their seats.

Airlines are pledging to keep flights below capacity to allow for more space between customers. Health officials have recommended distancing, especially indoors, to limit exposure to the coronavirus that causes Covid-19.

Delta Air Lines plans for 30pc of its year-ago schedule in July, including 35pc of domestic flights and 25pc of international travel. The airline will limit cabin seating to 60pc of capacity, and 50pc of first class capacity, through the end of the third quarter.

United Airlines says its July capacity will reach 25pc of its 2019 volume — "almost double the June 2020 schedule" — in part to limit the use of middle seats. Southwest Airlines says its July capacity will climb to 45-55pc of year-ago volume, with a load factor of 35-45pc.

The still-dismal volumes compare to US passenger screenings that plunged to just 87,500 on 14 April, or 4pc of levels a year earlier, that have since rebounded to 426,000 a day through the first 18 days of June — 17pc of year-ago levels, according to the US Transportation Security Administration. Daily screenings have increased from the previous week every day of the month so far, at an average rate of about 20pc per day. That pace has slowed in the second half of the month so far. Spacing decisions will mean the number of flights will rise faster than screenings.

Implied jet fuel demand climbed by mid-June to 788,000 b/d, half of the year-ago consumption and up from 352,000 b/d in early May. US diesel stockpiles increased at a rate of 3.2mn bl a week over that period, compared to a five-year average of 790,000 bl.

Refiners can limit but not eliminate their production of diesel and jet fuel, so a recovering air industry allows breathing room for storage and lets them ramp up overall crude throughput rates. US Gulf coast diesel premiums to WTI Houston crude have ticked higher, to $8.51/bl, compared to an average $4.37/bl in May, based on Argus assessments.

Summer break

Refiners have stressed that demand will guide their crude processing higher from current minimal rates across most of the country. Analysts look to the reopening of US schools in the fall to boost US gasoline demand that reached 80pc of year-ago consumption last week. Governors in Texas and Florida, the first- and third-largest gasoline consuming states, have said schools will reopen at full capacity. California, the second-largest gasoline demand state, has laid out conditions for reopening districts.

Easing childcare pressures may allow more workplaces to return employees to offices and restore US commutes. Trips to workplaces in the top five states for gasoline consumption remained at least 32pc below baseline in the week ended 12 June, according to the Google Covid-19 Community Mobility Data. Trips were 39pc below baseline in California and 43pc lower than baseline in New York, the fourth largest state for gasoline demand.

Los Angeles gasoline premiums to Alaskan North Slope (ANS) crude increased to $14.59/bl, from just 52¢/bl in April. That premium was 82pc of year-ago levels. Gulf coast gasoline reached a premium of $8.53/bl to WTI Houston last week, less than half of the average premium in the same week last year. Sustaining increases will depend on the broader economic recovery and the threat of new shutdowns to contain spikes in Covid-19 infection.

By Elliott Blackburn