Asian refiners see jet fuel as most profitable product post pandemic

Major Asian refiners are cautiously optimistic jet fuel sales would significantly boost their profit margins from the first quarter of 2022 as the companies broadly expect international flight routes to rapidly open up from February next year, anticipating over half of East Asia's population to be vaccinated by then.

Refiners across Northeast and Southeast Asia are hoping to see a strong revival in sales of middle distillates, especially jet fuel, once the COVID-19 pandemic comes to an end, refinery and trading sources said.

Out of 11 major Asian refiners, including PetroChina, SK Innovation, ENEOS, Idemitsu, Petronas, S-Oil, Pertamina, PTT and Formosa and others surveyed by S&P Global Platts, seven expect Asia's oil product demand to climb back to 2019 levels by February-March 2022, while three companies see the full recovery by May-June 2022.

Platts Analytics data showed combined gasoline, gasoil and jet fuel consumption in Asia's top four economies -- China, India, Japan and South Korea -- is forecast to improve to 13.82 million b/d in 2021 from 12.93 million b/d in 2020, but falling short of the 2019 level of 14.12 million b/d.

Although the slew of movement restriction measures enforced across many states and countries across East Asia and the continued risk of a resurgence of COVID-19 cases will likely hamper steady production, sales and exports of middle distillate fuels for the remainder of 2021 remains supported as vaccination gathers pace in the region.

This would eventually lead to full population mobility and active international travels by first quarter next year, trading and fuel marketing managers at four survey participant companies said.

Lucrative product, maximum margins

Asian refiners are especially looking forward to reviving their jet fuel production and sales when the pandemic comes to an end as aviation fuel tends to yield stronger profit margins than other fuel products.

The proportion of jet fuel production in the overall oil product output before the pandemic was roughly around 13%-17% for refiners in South Korea, Thailand and Malaysia, but the ratio has plunged to below 8% this year, according to information provided by the companies.

"Jet fuel is a high value product that often yields decent margins, so it's one item that any refiner would want to produce more and sell more," said a middle distillate distribution and marketing manager at Petronas.

In 2019, when Asian and global air passenger traffic flows flourished, the FOB Singapore jet fuel/kerosene crack spread against second-month Dubai swap averaged $15.8/b, while the FOB Singapore 92 RON gasoline crack averaged $5.5/b, Platts data showed.

"The rate of rebound in aviation fuel production and sales will significantly outperform all other fuel grades when the pandemic comes to an end, as this would lead Asian air traffic volumes to spike drastically," the marketing manager added.

Asia's major jet fuel supplier South Korea, for one, produced on average 14.23 million barrels/month of jet fuel in 2019, but the output has tumbled to 9.4 million barrels/month in 2020 and 7.5 million barrels/month to date in 2021, latest data from state-run Korea National Oil Corp. showed.

Once the Asian aviation sector comes back to life, the country is poised to ramp up the middle distillate fuel's production to at least 13 million barrels/month before grinding it back up to over the pre-pandemic level of 14 million barrels/month, according to information collected from three major South Korean refiners by Platts.

Aviation industry still in doldrums

The near-term outlook for Asia's aviation sector and jet fuel sales remains bleak.

Global aviation data company Cirium said in an Aug. 9 report that the global aviation sector is recovering, but at a "snail's pace," as the capacity for 2021 is still expected to be 40% below 2019 levels, with a full recovery expected to materialize only by 2024.

The bearish sentiment was echoed by the Association of Asia Pacific Airlines, which in its latest report on July 29 said that international passenger demand remained suppressed across the Asia- Pacific region, and airlines in the region carried only 1.4 million international passengers in June, a mere 4.4% of the 32 million carried in the corresponding month in 2019.

Airline industry statistics confirmed that 2020 was the worst year on record, the International Air Transport Association said in a publication released Aug. 3.

"At the depth of the crisis in April 2020, 66% of the world's commercial air transport fleet was grounded as governments closed borders or imposed strict quarantines. A million jobs disappeared. And industry losses for the year totaled $126 billion," Willie Walsh, IATA's director general, said.

Still, rapid actions by airlines, government support and the industry's commitment saw it navigate through the most difficult year in its history, he added.