By Alex Longley, Elizabeth Low, and Jack Wittels (Bloomberg)
22 March 2020
The world is close to running out of space to store all the fuel that jets are no longer burning.
Only about 20% of land-based storage for the product remains — about 50 million barrels — while airlines cut flights, according to Vienna-based consultant JBC Energy GmbH. A collapse in air travel due to the coronavirus pandemic has brought with it a plunge in fuel demand and the threat of a shortage of places to keep unwanted supplies.
The picture looks sure to worsen in the coming weeks and months unless oil refineries take drastic action of their own to cut output. Flight cancellations are destroying demand for the roughly 7 million barrels-a-day market, with some traders speculating consumption could have dropped by as much as 50% of that. Dubai-based Emirates, which runs the world’s biggest airline by international traffic, will suspend most passenger flights from March 25, it said Sunday.
It’s hard to pinpoint exactly when storages would hit tank tops because it’s unclear at this stage precisely how big the hit to aviation demand has been. Also uncertain is the extent to which refineries have already cut production or how much they can do so if required. Storage sites currently dedicated to diesel could be re-purposed for jet fuel — if there’s time and a workforce available to do that.
If either figure is right, and if oil refineries fail to respond by dialing back output, then land-based tanks will start to fill within weeks. While storage companies sometimes have unused space, that doesn’t necessarily mean it’s available for anyone to use. It can be reserved but not utilized.
“We could see floating storage being used as there is no other option,” said Sri Paravaikkarasu, Asia oil director at FGE. “Clearly onshore tank storage is getting filled at this point.”
Traders and shipbrokers report strong interest in booking tankers to keep fuel cargoes at sea.
There are also pockets of buying still. More jet fuel is finding its way to Latin America, where consumption has yet to have the same kind of hit seen in other parts of the world.
Signs of weak demand abound, however. The Colonial Pipeline, the largest fuel-link between the Gulf of Mexico and the East Coast, is lowering flows. The conduit carries multiple products including jet fuel, gasoline and diesel. The Philadelphia-based Trainer refinery, owned by a unit of Delta Air Lines, has shifted from jet fuel production to focusing primarily on diesel.
Analysts say there could be reductions in how much fuel refineries are making. That, though, would only add to challenges in the crude oil market, where an increasing number of tankers are already being booked to hoard barrels because of weak near-term demand.
While global oil consumption is being destroyed by the coronavirus — aside from the collapse in air travel, city lockdowns and quarantines mean people are driving less — Saudi Arabia is flooding the market with oil. The kingdom began aggressively adding barrels after Russia rejected its proposal to curb output and help shore up a glut.
Jet fuel’s premium to crude, its so-called crack spread, has plunged to about $8 a barrel in northwest Europe. That could mean even less refining, adding to an oversupply of crude.
“Jet fuel cracks have been hit the hardest as flights have been grounded to halt the spread of the coronavirus,” according to Rui Hou, a research analyst at Wood Mackenzie Ltd., adding that sluggish demand for transport fuel is generally bad for refining margins. “Consequently, refiners are likely to cut the crude runs to get through the tough time.”
— With assistance by Serene Cheong, Alaric Nightingale, Jeffrey Bair, Ann Koh, and Javier Blas
Majors look to store jet fuel at sea as air travel drastically curbed
By Ron Bousso, Stephanie Kelly, Laura Sanicola (Reuters)
LONDON/NEW YORK (Reuters)
Major oil companies including BP and Shell are preparing to take the rare step of storing jet fuel at sea as the coronavirus outbreak disrupts airline activity globally, while refiners are shifting to diesel because of the poor margins associated with jet fuel production.
Jet fuel demand has cratered as airlines suspend flights due to the coronavirus pandemic, which globally has infected more than 204,000 people and killed 8,700, prompting travel restrictions from governments around the world, including the United States. Market participants and refiners have had to scramble to adjust to incredibly low prices.
Storing jet fuel at sea, however, is something of a last resort. The product is sensitive to contamination and degrades more quickly than other refined fuels and especially crude oil, so after a few months, it no longer can be used for aviation, according to analysts.
“The industry generally expects products will be used within three months of being produced,” said George Hoekstra, an independent consultant specializing in hydroprocessing technology.
Gulf Coast jet cash prices were at 26.50 cents per gallon below futures, the lowest seasonally since at least 2011, the earliest data available, Refinitiv Eikon data showed.
Jet fuel demand averages about 8 million barrels per day, but that has already dropped by about 20%, according to Robert Campbell, head of oil products at consultancy Energy Aspects.
Overall, the oil market could see a record build in supply in April that could overwhelm storage capacity within months, analysts said.
BP has provisionally booked the 60,000-tonne Stena Polaris tanker to store jet fuel for 40 to 60 days starting March 20 to March 22 at a rate of $25,500 a day, according to shipping and trading sources.
A BP spokesman declined to comment.
Royal Dutch Shell has provisionally booked Torm Sara to store jet fuel for 90 to 120 days, sources said.
“With European kerosene (jet fuel) stocks near record levels, floating storage is one possibility for surplus jet fuel, though due to strict quality specifications, traders will be reluctant to attempt long-term storage of surplus fuel given the risk of contamination,” Campbell said.
Demand for jet fuel storage has also increased in the United States, said Ernie Barsamian, founder and chief executive of The Tank Tiger, a terminal storage clearing house based in Princeton, New Jersey.
SHIFTING THE MIX
Storing refined products is more difficult than storing crude oil due to concerns about oxidation, stability and moisture content,
Some U.S. refiners have decided to blend jet into the diesel pool, which is currently more profitable. A small amount of jet fuel can be dropped into diesel in crude distillation towers at a refinery, which separates raw crude oil into products with different boiling points.
Refiners can also choose to adjust their fluid catalytic cracking units to yield less gasoline and more distillate.
“We are putting everything we can into diesel,” said one refining source, who wished to remain anonymous.
The move could be oversupplying the diesel market in some regions of the United States, however, traders said. Cash prices for diesel have fallen despite the impending spring planting season for farmers, which typically boosts diesel demand and prices.
U.S. Gulf Coast cash prices for ultra-low-sulfur diesel have fallen this week to 6 cents per gallon below the futures contract, traders said, the lowest seasonally since 2016.
Reporting by Ron Bousso and Jonathan Saul in London and Stephanie Kelly, Laura Sanicola and Devika Krishna Kumar in New York; Editing by Mark Potter, Sonya Hepinstall and Leslie Adler