SINGAPORE (Reuters) - Asian refining margins for jet fuel have surged to their highest in nearly six months and their strongest seasonal levels in the last six years, as heavy demand for summer travel boosts an already-thriving aviation market.
Refining margins, also known as ‘cracks’, for jet fuel JETSGCKMc1 climbed as far as $15.21 a barrel over Dubai crude this week, levels not seen since mid-January.
“There is still a surplus of jet fuel in Asia, but it is the traveling season now and demand will be growing in the region, supporting the market,” said a Singapore-based trader, declining to be identified as he was not authorized to speak with media.
“Many jet barrels from Asia usually go to the West Coast of the United States. And now there has been a major fire in one of the U.S. refineries. So, that might lead to more barrels heading west (from Asia), supporting the regional jet market even more.”
Philadelphia Energy Solutions (PES) is looking to permanently shut its oil refinery in Pennsylvania, which is the largest and oldest on the U.S. East Coast, after a massive fire caused substantial damage to the complex. [nL2N23X114]
The profit margins refiners make from producing jet fuel, which have surged about 18% over the last month, are currently at their strongest levels for this time of year since 2013, Refinitiv Eikon data showed.
That is mainly due to an aviation sector that is booming on the back of regional economic growth, with new and expanded airports, cheap fares and increased route options for travelers.
Airlines in the Asia Pacific posted a 2.9% increase in April passenger demand this year, up from 2% growth in March, according to the latest available data from the International Air Transport Association (IATA).
However, air freight demand in the region has been hit hard by Sino-U.S. trade tensions. Demand for air freight in the area dropped 7.4% in April year-on-year, IATA data showed.
“Our expectations for a continued tightening of the crude market through H2 will support jet fuel. However, we note rising risks to the demand-side, with the U.S.-China trade war continuing to dent sentiment for Brent,” said Richard Taylor, London-based analyst at Fitch Solutions.
“Amid a negative backdrop of slowing global growth, trade concerns must be monitored, as any material slowdown in industrial, manufacturing and trade activities over the coming weeks has the potential to negatively impact prices/margins.”
Meanwhile, the front-month jet fuel time spread JETSGSPDMc1 flipped into a narrow backwardated structure on Thursday to trade at a premium of 1 cent per barrel.
Backwardation, when the front-month contract is more expensive than subsequent months, makes it uneconomical to store a product, resulting in a drawdown in inventories. It is usually seen as a sign that a market is rebalancing and that prices are likely to head higher in future months.
Reporting by Koustav Samanta; Editing by Joseph Radford