Viewpoint: Low prices may carry airlines further

OREANDA-NEWS. July 23, 2015. US airlines expect to benefit from low jet fuel costs through the remainder of the year, as prices have descended to their lowest levels in seven years without any turbulence from a global recession.

"Overall, we continue to expect fuel costs to be an enormous tailwind and to provide a net benefit of \\$2bn this year," Delta Air Lines chief financial officer Paul Jacobsen said this month.

Gulf coast Colonial jet A moved to 150?/USG by mid-July, down by 50pc from a year ago and 20pc under prices seen in early May. The 50pc price drop in global crude was the main driver, but jet fuel buyers are also enjoying a knock-on effect of a US refining industry running its plants at exceptionally strong rates — US refinery utilization has averaged 91pc — because of robust margins.

The Gulf coast 3/2/1 crack spread, or the premium of Colonial gasoline and diesel over Light Louisiana Sweet (LLS) crude oil, moved to \\$23/bl in the third quarter, up by \\$8/bl from a year ago, incentivizing refiners to maintain strong output levels.

Not so long ago, US jet fuel markets such as the New York Harbor and the west coast saw tight conditions because of supply issues. Weather-related refinery shutdowns pushed Atlantic coast stocks to a 19-year low at 7.4mn bl in late March and caused the NYH premium over the US Gulf to average 13.3?/USG during the first quarter, or 8.3?/USG above the cost of transportation. Peaking NYH price levels attracted arbitrage barrels across the globe and caused Atlantic coast year-to-date imports to rise by 50pc to 90,000 b/d over year-ago levels.

On the west coast extensive refinery maintenance also supported imports, which leapt by 120pc over year-ago levels to 53,000 b/d from January to July. Tesoro had to shut down its 168,000 b/d Golden Eagle refinery in Martinez, California, and run it as a terminal between February and April after members of the United Steelworker (USW) union went on strike during the final stages of a major turnaround. A healthy 10?/USG Los Angeles jet fuel premium over South Korea suggests that the region will continue to attract Asian barrels in the near future.

But since May US jet fuel production outpaced demand by an average of 80,000 b/d. Inventories reached a 2.5 year high at 43.5mn bl in July, pressuring prices across all US regions and quickly shifting gears from under- to over-supplied market conditions.

Strong midcontinent refinery run rates caused the year-to-date Chicago jet fuel premium over the US Gulf coast to decrease to 8?/USG, compared to 16?/USG in 2014. But the market is unlikely to revert back to the 2-3?/USG premiums seen prior to the Teppco pipeline reversal in July 2013 that limited supply opportunities out of the US Gulf.

Where the jet fuel market goes in the fall depends largely on the global crude prices, but slowing seasonal demand typically causes the market to get longer in August and September. That should keep downward pressure on prices until the fall refinery maintenance season in October and rising holiday travel starting in November.