Oil prices are soaring as the Middle East war chokes crude supplies, but fuel price premiums over crude are climbing even faster as the de facto closed Strait of Hormuz forces refiners in Asia to consider slashing processing rates and limiting exports.
The product market came under more severe stress than the crude markets as the war dislocated oil and fuel supplies and sent jet and diesel premiums over Brent to astronomical highs.
Nowhere has the stress been more severe than in jet fuel cracks and prices, signaling acute price pain for airlines and consumers going forward.
The price of jet fuel at Asia’s key hub Singapore, soared by 140% last week compared to February 27, the day before the war in Iran began.
Singapore’s jet fuel prices hit $230 per barrel.
“If crude had tracked jet fuel’s proportional move, Brent would trade around $175,” Andon Pavlov at Kpler commented.
In Europe, northwest European jet fuel traded at double the price of crude—at an $88 per barrel premium to the North Sea Dated benchmark crude basket and a $91 premium to front-month ICE Brent futures on Thursday, according to Argus assessments.
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The jet fuel premium to crude, also known as crack or refining margin, hit a record high as it surged by more than 350% compared to a year ago, per Argus data.
The cracks of all refined products surged as supply disruptions intensified, but none have seen the pace of the skyrocketing jet fuel prices.
There are several reasons for the surge in jet fuel prices, and the disrupted supply of both crude and products from the Middle East is just one of these, analysts say.
The specifics of producing and storing jet fuel compared to other fuels make the kerosene market the most vulnerable to the major shifts in physical supply seen over the past week.
Moreover, Gulf producers’ medium sour barrels without a way out of the Strait of Hormuz have higher yields of the middle distillates, jet fuel and diesel, compared to most other grades from Africa and South America, as Reuters columnist Clyde Russell argues.
The alternative supply, for which refiners are now fiercely competing, would be, in large part, lighter grades that would be more suitable for the light distillates gasoline and naphtha.
Jet fuel is currently the most stressed barrel, June Goh, Senior Oil Market Analyst for Sparta Commodities, says, noting that jet fuel has very specialized tank storage requirements and there isn’t much of it stored globally, unlike many other products such as diesel and gasoline.
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Asian refineries have started cutting runs as their crude cargoes are stuck at the Strait of Hormuz, while refineries in Bahrain and Saudi Arabia have been hit by the attacks. Additionally, any middle distillates exports from the Middle East are also stuck around in the Persian Gulf, further tightening the global jet fuel market.
“Roughly a fifth of global jet exports pass through the Strait of Hormuz, double the share of diesel, leaving airlines scrambling to secure supplies in the short to medium term,” James Noel-Beswick, Head of Commodities for Sparta, commented in an analysis this week.
In addition, jet fuel – unlike diesel – can’t be blended, it’s only produced in refineries.
“For now, the message from the market is clear: middle distillates sit at the centre of the storm, and jet fuel appears to be the most exposed of all,” Sparta’s Noel-Beswick said.
Going forward, the astronomical jet fuel premiums could drop if there were a de-escalation in the Middle East, but fuel cracks would remain higher for longer as the market needs to overcome the current dislocation of supply chains.
“Jet and diesel crack spreads are likely to remain elevated well beyond conflict resolution,” Kpler’s Pavlov said.
“Gasoline risk is building into the summer demand season.”
By Tsvetana Paraskova for Oilprice.com
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