Product tankers: jet fuel cargoes searching the globe for a home

The imposition of travel restrictions and lockdowns in Asia has reduced air travel all but closed the main outlet for jet fuel. On-land storage is filling fast, making water storage increasingly likely

The sudden lockdowns imposed across Asia, most of Europe and some of Scandinavia have had a dramatic impact on aviation demand. Except for a few repatriation flights, general passenger aviation has come to a halt.

This is a very different picture from the demand expectations at the start of 2020. As real-time tanker analytics provider Vortexa explained in a recent webinar, there were three main expectations for the jet fuel market going into the year. The first was growth in the number of passengers using airlines; the passenger association IATA forecast a 4.1% year-on-year growth in demand in 2020. Second, the impact of IMO 2020 was expected to increase middle distillate demand, also leading to an increase in demand for jet fuel.

The third expectation was that the heavy maintenance schedules of Middle East refineries would tighten supplies in their customer bases of Europe and East Africa. But some of the major refineries in the Middle East have now gone offline, resulting in a significant change in the direction of jet fuel imports and exports. Middle East refinery customers on the west coast of North America, in Europe and in Oceania have switched to imports of jet fuel from India, East Asia and South East Asia, producing significant increases in product tanker tonne-mile demand.

The impact of Covid-19 coronavirus of the jet fuel market and in terms of demand for product tankers can be seen from the behaviour of jet fuel imports into Hong Kong as travel restrictions were imposed. According to Vortexa, Hong Kong is the largest seaborne importer of jet fuel in the world and the impact was felt immediately by South Korea, which is the largest seaborne exporter of jet fuel. Asian-produced jet fuel flows were switched across to the Pacific to North America, Oceania and as far as Europe.

As the pandemic spread eastwards to Europe, Vortexa noted a 50% drop in jet fuel demand in Italy. However, jet fuel imports into the main storage ports and airport distribution hubs like Le Havre increased. As the European storage hubs filled, cargoes from South Korea were diverted across the Atlantic to storage in the Caribbean. This has had a positive impact on product tanker tonne-mile demand, leading to an increase in earnings.

Vortexa notes that the situation is dynamic and as the pandemic takes hold in North America and aircraft are grounded, jet fuel from Europe and South Korea bound for the Caribbean for storage is likely to be affected by the surplus of jet fuel produced in the USA.

On the pricing side, the continued production of jet fuel in a time of plummeting demand is forcing down the price to the point that, like crude oil, a significant contango has appeared. This has led to two LR1 tankers being used to store jet fuel off Malta and a jet fuel-laden VLCC newbuilding. This rare event shows that traders are looking for ways to create outlets for jet fuel being produced in Asia. Vortexa estimates that in March, on the water, jet fuel storage stood at 6.8M bbls, versus 2.4M bbls in February.