Jet Slips on the Week, but Holds Near $1

October 1, 2020
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A flat forward curve is giving consumer-hedgers an excellent opportunity to limit future volatility 

Since early 2020, lack of demand for Jet and low oil prices have conspired to hold the Jet curve at a very low level. It is rare for product curves to be so low and flat. Usually, short-term price weakness translates intoa an upward-sloping forward curve that limits consumers’ ability to hedge effectively.

Not so this time. A flat curve, where late 2022 Jet prices are almost the same as spot rates, allows the Jet consumer to lock-in low prices for multiple years.

Below we discuss some of the elements that are contributing to Jet prices.

Jet price can be simply disaggregated into two major components: the cost of crude oil to a refinery, and the gross margin — or Jet “crack” — the refinery can capture. Added together, these two elements are exactly the price of Jet. 

Recently, oil prices (Nymex WTI) have slipped below $40 as worldwide demand recovery has faltered and OPEC supply has ticked higher.

Further, the Jet crack has not helped. Refining margins are very thin. The entire Jet curve is holding at these levels, displaying the pessimistic outlook among traders for all things oil. AEGIS holds a view that oil prices have a much better chance to escalate in late 2021. Consumers of Jet should consider buying swaps all across this curve, especially beginning in 2H2021. 

Refinery margins for making Jet are so low that many are avoiding producing it altogether. 

And, that trend should continue unless demand for jet fuel rises. Through 2022, the simple Jet crack (jet price less crude-oil price) is near zero. This means refineries are not incentivized to make ANY Jet at all.

Those molecules do still exist in the crude oil, though. Therefore, refineries will be making every effort to change their yield patterns to move those molecules into the diesel pool, or gasoline when possible.

Oil prices remain near $40 through 2022. However, AEGIS believes the global supply-demand balance for petroleum is likely to improve significantly sometime near late 2021. If this view is correct, Jet consumers need to be very wary of price increases in 2022. 

For many consumers with predictable purchase volumes, using swaps to aggressively lock-in Jet prices beginning in 2H2021 is our base recommendation.

The Jet crack is likely to widen if demand for the fuel rises. In the U.S., passenger flights are still carrying much fewer people than a year ago. TSA checkpoint data shows passengers number only about 40% of year-ago levels.

However, demand for all distillates (think diesel) has come back to a normal seasonal level. Trucking, logistics, and passenger vehicles have shown some demand recovery.

Much less refined products, of all types, are being made now than a year ago, despite some recovery form the lows in April and May 2020. 

Refinery input is low, reflecting poor margins and lack of demand for fuels.

Refiners have reduced their runs, but they have also avoided making Jet-like fuels. Therefore, Jet inventories are low. 

However, diesel-like fuel inventories have risen. Very low margins in upgrading molecules to Jet are leaving more supply for diesel. 

One final measure of distillate fuel demand shows modest recovery, too. The U.S. has resumed exports to within the five-year range, although near the bottom of that range. International demand for distillates is not high enough to encourage higher volumes to leave the U.S. 

Bottom Line: Although the Jet curve is low right now, an increase in oil prices or rising Jet demand (which would also influence oil prices) could quickly lift Jet prices. This would be a costly mistake for the consumer to not have swaps or caps (call options) in place to protect against rising fuel costs. We remain bullish on oil prices in late 2021. 

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