Middle Eastern jet fuel flows to Europe climb as Russian sanctions loom

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Europe's jet fuel purchases from the Persian Gulf are on the rise as air travel demand improves and the continent replaces Russian barrels with other origins ahead of its February price cap deadline, boosting cash differential for spot barrels, market participants said.

The EU is expected to place a price cap Feb. 5, 2023, on Russian refined oil products in the wake of Russia's invasion of Ukraine in February 2022.

The Platts cash differential for Persian Gulf jet fuel/kerosene spot cargoes averaged plus $8.21/b to Mean of Platts Arab Gulf jet fuel/kerosene assessment in October, jumping more than 25% from September's average of plus $6.55/b, S&P Global Commodity Insights data showed.

The Mediterranean's share of Europe's overall jet fuel imports has increased considerably in recent months.

Cargoes flowing from the Persian Gulf to the Mediterranean have risen despite a marginal arbitrage disincentive, according to S&P Global's calculations of refined products arbitrage flows. The average arbitrage to ship Persian Gulf jet fuel cargoes to the Mediterranean stood at an incentive of minus $1.51/b in September and plus 14 cents/b in October.

Shipping industry estimates show total jet fuel loadings bound for Europe from the Persian Gulf in November are expected in the 1.6 million-1.7 million mt range.

Market participants, who track the movement of tankers loading jet fuel, said shipments were slightly above 1.5 million in August and September and are marginally higher than 1.6 million mt in October. The details about shipments over the last October weekend are expected in a few days and may bring the final number closer to 1.7 million mt.

Several ports in the Mediterranean previously receiving gasoil and jet fuel cargoes from Russia on Medium Range tankers have substituted the volumes with Middle Eastern origins that are now mostly loading on Long Range 1 tankers, said an executive with a clean tanker company. MRs carry cargoes of about 35,000 mt, while LR1s can carry up to 65,000 mt.

Close to a dozen European airlines that were regularly buying Russian jet fuel are in the process of substituting those volumes, another chartering executive said.

Shipping sources tracking jet fuel deals said the share of Mediterranean deliveries in Persian Gulf jet fuel shipments to Europe likely climbed to 30% in October, from 22% in September and 16% in August.

Tentative jet fuel fixtures and loadings in October indicate that Mediterranean-bound shipments may have reached 500,000 mt, double the August volume, a shipping executive said.

The fixtures and loadings include loadings on tankers in the spot market and on ships, which trading and refining companies take on time charter, market sources said.

But the surge in imports is not entirely linked to Russian sanctions as air travel demand has also rebounded.

Asian jet fuel demand faces headwinds

While healthy arbitrage flows have supported prices since the onset of the Russia-Ukraine war, sources said the Asian jet fuel market was still plagued by uncertainty stemming from a lack of transparency on China's export program and COVID-19 lockdowns and mobility restrictions.

"China is a major uncertainty factor for the market right now," an Asian refinery source said, citing a lack of clarity over the country's COVID-19 curbs and refined product export quotas.

Some trade sources estimate that Chinese jet fuel outflows could hit 2 million mt in November, while others anticipate potentially higher volumes because of patchy demand in the country.

Aviation experts said the pace of air travel demand growth is expected to slow in the fourth quarter due to rising inflation and the waning effect of pent-up demand from the pandemic.

"All this talk about revenger travel, it's not sustainable," Shukor Yusof, founder of aviation insights firm Endau Analytics said. Yusof and several other market watchers have warned that rising aviation fuel cost and global inflation is set to erode air travel demand as airfares continue to rise.

The FOB Singapore cash differential had lost nearly half its value over a span of eight trading days to plus $1.69/b to Mean of Platts Singapore jet fuel/kerosene assessment Nov. 2, before rebounding to plus $1.99/b Nov. 4.

The weakness was also reflected in the derivatives curve, with the November-December time spread narrowing 86 cents/b, or 24%, to plus $2.72/b Nov. 4 since the start of the month.

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