U.S. Jet Fuel Glut Is Too Big for Surging Air Travel to Drain

(Bloomberg) - The US is swimming in so much kerosene that even the surge in air traffic this summer cannot save the market.
Air traffic in the US has grown to more than 2 million passengers per day, according to the Transportation Security Administration, which is about 78% of the level in summer 2019. That has done little to reduce the massive flood of kerosene inventories, which have reached their highest seasonal level in a decade. Part of the problem is that refineries are trying to catch the rebound in gasoline demand by increasing production rates, which indirectly leads to higher production of kerosene.
The global oil market cannot fully recover to pre-pandemic levels until kerosene consumption returns to normal. The US has one barrel of aviation gasoline for every three barrels of diesel and every five barrels of gasoline in its warehouse, as figures from the Energy Information Administration show, so the aviation sector has a significant impact on how much refineries can process.
"Traffic data is a false flag for the jet fuel market," said Zachary Rogers, director of global oil service for Rapidan Energy Group. "The real key figure is the number of international flights, which at this point has barely recovered, and there is a threat of headwinds."
The best indicator of market mismatch is the widening gap between kerosene and diesel. Typically the two products are traded within a nickel of each other, but physical jet fuel currently costs 18 cents a gallon less at the Gulf Coast refining center. Most analysts say a 10 cents spread would indicate the beginning of a rebound in jet fuel markets.
"To meet gasoline demand, the market had to be flooded with kerosene, which went into the diesel pool, as refineries can only minimize the middle distillate supply to a certain extent," said Linda Giesecke, Manager Global Fuels at ESAI Energy.
Most aviation recovery projections assume a return to pre-2020 conditions by next year or later. JPMorgan Chase & Co. analysts recently wrote in a press release that world fuel consumption will be 80% of normal after next winter.
Some airlines are still advising caution on the travel comeback, with Southwest Airlines Co. and American Airlines Group Inc. curbing their optimism this week. The return of major international business travel remains cloudy as flights from much of Europe and the UK are still restricted as the Delta variant gains ground.
The big increases in the demand for kerosene have already been achieved, said Rebecca Babin, Senior Energy Trader at CIBC Private Wealth, USA. The market will continue to move towards firmer base, but the rate of change could slow down, she said.
"I have a feeling the market is really expecting significant improvements and I think they could be a little smaller," she said.
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