Oil and refined products trends are in the sights of S&P Global Commodity Insights editors this week. We consider the impact of US jet fuel and diesel price hikes, as well as trans-Atlantic freight costs, oil demand in North Africa, and more.
1. Surging US jet fuel prices drive historic rise in airfares
What’s happening? The most recent US consumer price index report showed a rise of 8.2% from a year ago across all items, but airfares were up 33.3%, and increased 18.6% in April alone. This was the largest month-on-month increase since the inception of the series in 1963. Spot jet fuel prices have risen 157% on year, according to the US Department of Energy latest data, suggesting the upward pressure on airfares will continue to possibly worsen in early summer.
What’s next? The sharp rise in airfares, with the prospects of further pricing pressures, could deter summer travel at the margin, over the summer. US kerojet demand in April, as estimated by the analytics team of S&P Global Commodity Insights, is still down about 11% compared to 2019 pre-pandemic levels. That impairment is expected to remain fairly steady through at least July before modestly lessening in August to about 7%, but is predicated on continued growth in disposable income and some moderation to the spike in airfares.
2. VLCCs remain present in increased USGC-UKC trade amid midsize tanker volatility
What’s next? Freight for midsize tankers has since fallen from peaks seen in early April. VLCCs, however, have also seen sunken rate levels, ushering their return to the trans-Atlantic play. Future cannibalization of midsize tanker trans-Atlantic cargoes and covered barrels on previously booked VLCCs making the USGC-UKC run could lead to further softening in the Suezmax and Aframax freight environment.
3. US SPR drawdown begins, to continue until October
What’s happening? Nearly 7 million barrels of crude left the US Strategic Petroleum Reserve in the week ended May 6, the largest one-week drawdown in the history of the 40-year-old emergency stockpile. It was the start of deliveries for the 180-million barrel drawdown that will continue through October.
What’s next? S&P Global Commodity Insights estimates an average of 905,000 b/d of SPR crude will flow to the market from mid-April through October, with additional drawdowns by other International Energy Agency nations raising global SPR flows to about 1.4 million b/d. The US Department of Energy will auction the next batch of crude May 24 for delivery in June and July.
4. US driving season could support demand for blendstock components
What’s happening? MTBE prices reached 10-year highs, peaking May 6, at $1,412.75/mt FOB ARA amid higher buying interest in a tight European market and considering recent gasoline gains. The MTBE premium over front-month EBOB swap on May 11 reached the highest level since September 2015 at $249.25/mt, coinciding with a record toluene premium of $200.25/mt following a surge in demand for its use as an octane booster. With gasoline production currently so lucrative, gasoline blending components are experiencing premium increases ahead of the peak summer driving season.
What’s next? Edging towards the summer driving season, demand for high octane blendstock components such as MTBE and toluene is set to continue to grow, as the US fulfills its gasoline demand before summer and with the market monitoring if a widened gasoline-naphtha spread would continue to strengthen blending economics. Toluene supply is expected to increase as premiums become attractive enough to incentivize refinery production.
5. North Africa’s Q2 oil demand growth seen slowing
What’s happening? Countries in North Africa – Algeria, Egypt, Libya, Morocco and Tunisia – are grappling with soaring imported grain prices, creating a financial burden for the government and households. Prices at the pump are also soaring. Compared to before the Russia-Ukraine war, gasoline prices have risen 5.4% in Egypt and 9.5% in Morocco, still well below the rise seen in spot markets. Similarly, diesel prices at the pump have risen by 11% in Tunisia and have surged over 40% in Morocco. Prices in Algeria and Libya remain unchanged.
What’s next? North Africa’s 2022 oil demand growth is forecast at 35,000 b/d, a notable mark down from the pre-war outlook of 65,000 b/d. Put differently, the demand growth trajectory is less robust than projected in February, before the Russian invasion of Ukraine.
6. Higher diesel prices reveal signs of demand destruction
What’s happening? US distillate demand is usually thought to be more resistant to diesel price hikes because such increases are more likely to be passed along to end-user customers, and are a smaller part of the overall cost of the goods being manufactured and delivered compared with gasoline prices. Even so, this year’s steep price hike seems to indicate a degree of diesel demand destruction occurred in recent weeks. This is illustrated by comparing current distillate demand with a three-year average (2017-2019) of demand, which represents a pre-pandemic pattern with respect to levels and seasonality. Weekly demand in Q4 2021 and early 2022 was above its historical average until the week of March 11 when diesel prices jumped 18%. Since then, demand has fallen about 265,000 below its three-year average. In contrast, distillate demand over the first nine weeks of the year was about 385,000 b/d above the three-year average.
What’s next? Adjusting for differences in weather and farming versus their three-year average, S&P Global Commodity Insights estimate that the higher diesel prices resulted in about 200,000-300,000 b/d destruction in distillate demand. S&P Global analysts expect that the increase of around $0.50/gal in diesel prices over the last two weeks will hurt diesel demand especially in PADD I where prices are $0.20 higher than the national average. Truckers are reimbursed for higher diesel prices based on the national average. East Coast truckers paying more than the national average will get hurt. If price-induced demand destruction is insufficient, some major fuel distributors are warning of possible outages.
Reporting and analysis by Alan Struth, Catherine Wood, Meghan Gordon, Naing Oo, Maria-eleni Tsimeki, Abdi Salad, Robert Eisen