Jet Fuel-Gasoil Cash Premiums; How has the Downstream sector been affected?

  • Jan 28, 2020 AEDT
  • Team Kalkine
Jet Fuel-Gasoil Cash Premiums; How has the Downstream sector been affected?

Oil prices continued to dip on Monday, from the highest levels for the year at the US$55.26 a barrel for WTI crude prices. Crude Oil and even Jetfuel or Aviation fuel is expected to be affected due to the Coronavirus. The implications are much more beyond the demand of a certain product; the trade talks between the US and China have been halted for the week as China is under a shutdown. The IMO 2020 regulations restrict the Sulphur limit on marine fuels, affecting the demand for marine fuel products.

Coronavirus

The Coronavirus fears are now a reality affecting crude oil demand and prices. The cooling of oil demand means that the global oil market would be in a supply glut to a greater extent in case no strong measures are taken to reduce supply.

With the death count for the virus increasing to 80, and almost 3,000 confirmed cases been reported as of now, China extended its Lunar New Year holiday and was pushed to take the drastic measures to control the dissemination of the virus. Almost 5 cases have already been reported in the US, with a few in Japan and France. All major international airports have been equipped with protective medical equipment for identifying infected cases before any infected person enters their territory.

As per the statement from the mayor of Wuhan, the center point of the Coronavirus, almost 5 million of the total population of 11 million people, had already left the region before the travel ban was implemented to quarantine the region. The delay in the travel ban and effective measures from the authority may be responsible for the spreading of the infectious disease to the scale of an epidemic.

Travel Stocks impacted by Coronavirus: Must Read

Coronavirus and the middle distillates

Almost 1.5+ Billion or about a quarter of the world's population celebrates the Chinese New Year, and the celebrations are not only limited to the Chinese cities but have become a popular festive throughout Asia and other geographies. Therefore, its anticipated that lesser tourist from China are expected, and those who are willing too might face medical scrutiny and not the welcome hand as they would have expected. The tourism sector dependent on-demand surge on the festive seasons, and with the quarter of the world not in the jolly mood the shares of the travel stocks and the airlines have dipped in the recent few days.

The jet fuel or aviation fuel demand is expected to take a dip due to the ongoing issue. The spreading of Coronavirus is expected to have impact on the market sentiments, leading to no surge in demand which the crude oil market prepares for during this time of the year.

Overview Of Crude Oil And Conventional Oil-Focused: Read Here

IMO 2020: Switching to cleaner and sweeter Gasoils

IMO 2020, also called as the International Maritime Organisation's regulation, mandates on the upper limit of Sulphur content in the marine fuel to 0.5% from 1 January 2020. The regulation has been highly discussed in media and among the IMO sessions throughout the past year.

The last amendment in the marine fuels was in 2012 when the sulphur content in the marine fuels was limited to 3.5%, with 0.5% being the limit in certain areas (NW Europe, Baltic Sea, North America including the US and the Caribbean islands) since 2015. Whereas to compare conventional road transport follows a sulphur capping of 0.001% across most part of the world, including the US, India and Europe.

IMO 2020 beneficial for the Australian Miners: Read Here

What does IMO 2020 mean for the Downstream sector?

The implication of the amendment in the regulations would be shared by the refining sector and the mining industry. The stricter rules require the refiners to go for further desulphurisation of the maritime fuel product, therefore requiring higher operating expenses.

The refineries would need to ramp down the production of high sulphur fuel oil and ramp up the production of sweeter fuel oil. Example: Viva Energy already launched the first very low sulphur fuel oil suitable for the marine industry from its Geelong refinery.

The new rule will lead to the creation of new fuel products, compliant to the new standards including the VLSFO (very low sulphur fuel oil) and the ULSFO (Ultra-low sulphur fuel oil). The refiners in order to prepare newer fuel products are left with the following two options-

  1. Investing in further desulphurization process of the gas oil and bearing higher operating expenses
  2. Buying sweeter crude oil, crude with lower sulphur content

With the anticipated supply cut of Crude Oil by the OPEC+ nations, the hunt for a sweet crude could be less economical for the refiner’s pocket. The demand for heavy crude oil is likely to decline.

10 ppm Gasoil cash premiums in Singapore as of 24 January Source: Refinitiv Eikon

The 10 ppm Gasoil cash premiums in Singapore (G010-SIN-DIF), now stand at US$0.21 a barrel on 24 January, recovering from US$0.15 on Wednesday. The refiners are facing the heat of the new (International Maritime Organization) IMO fuel rules which restricts the use of marine gasoil with sulphur content above 0.5% from 1 January 2020, thus reducing the cash premiums compared to 2019.

The demand expected from the ship owners is lower than the expected as few shipping operators have already switched to VLSFO (Very Low Sulphur Fuel Oil), which is expected to grow over a period of months.

The Refinery Margin Netbacks Dubai Crack-Singapore Refinery Profit stood at US$1.03 a barrel as on 24 January 2020 (DUB-SIN-REF).

Refinery Margin Netbacks Dubai Crack-Singapore Refinery Profit as of 24 January Source: Refinitiv

The refinery margin shows the value added to the crude oil to produce higher-value processed products and the netback indicates the net income of the refiner on every barrel of Crude Oil. The refining margins is also known as the cracking spreads.

To conclude:

The Chinese Lunar new year holiday would run for a week starting from 25 January, historically boosted the aviation sector demand but the sector does not expect similar trends this year due to the outbreak of Coronavirus which led several cities been quarantined, reducing the jet fuel consumption.

The warmer than normal winter temperatures in northeast Asia this year have slowed down the seasonal demand for heating kerosene, which belongs to the same grade as of the Jet fuel further declining the jet fuel margins.

The market dynamics for the crude oil and the middle distillates are affected by geopolitical issues such as the US China trade war talks. Further, the Coronavirus epidemic has become a global issue and needs to be worked out in close association between nations, transient pressure on demand stemming from the usual Chinese New Year celebrations is currently underway. The sweeter marine fuel demand would gradually increase over years as more and more ship owners look for a permanent solution and will subside over time.


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