Asia jet fuel/kerosene near-term demand to remain slow, longer-term outlook optimistic

Recovery in Asian jet fuel/kerosene demand will likely remain slow until around the end of 2023 owing to tepid consumption and availability of good supply from China, but as the country's economy recovers from COVID-19 woes, the longer-term outlook for aviation fuel is seen as optimistic, according to industry sources.

The Asian jet fuel/kerosene market has been caught in an extended lull on the back of the seasonal off-peak travel demand season, which has resulted in airlines cutting back on seat capacity in both domestic and international segments. Latest data from travel company OAG showed that for the week beginning Oct. 23, global airline seats fell by 1.1 million, or 1%, on the week to 108.3 million.

Regional demand also took a hit, as kerosene demand from Northeast Asia was pushed forward on the back of a mild winter due to El Nino, with many industry sources saying that heating oil season could start in early November.

Asian market participants said in the week beginning Oct. 23 that good export volumes of jet fuel from China have also weighed on the middle distillate.

"Sentiment is quite weak – while China's exports of the other two products [gasoil and gasoline] are less, jet fuel is holding steady to higher at least until October so that is adding some pressure in the market," a Singapore-based trader said.

Another market participant agreed, saying that export volumes from China, at least until October, have been placing more downward pressure on the market.

"With no fourth batch of quota export volumes, November and December [jet fuel] volumes will be lower [from China], but even then, this would just be taking out excess length in the market," the regional trader said.

Market participants are anticipating jet fuel outflows from China to fall to around 1.4 million mt in November down 26.3% from October's planned export of around 1.9 million mt. The decline comes as almost 80% of China's three export quotas have been utilized, with the possibility of insufficient export quotas in the fourth quarter, industry sources said. General Administration of Customs data released Oct. 18 showed that China's September exports of jet fuel/kerosene amounted to 1.45 million mt.

Platts assessed the cash differential for jet fuel/kerosene cargoes for loading from Singapore at a fresh two-month low of 60 cents/b to the Mean of Platts jet fuel/kerosene assessment at the Asian close Oct. 24, S&P Global Commodity Insights showed, down 6 cents/b from the previous day. For the month to date, the cash differential has averaged plus 94 cents/b, down from the plus $2.26/b averaged in September and plus $1.67/b averaged in August. The assessed cash differential was last lower at plus 32 cents/b Aug. 4, S&P Global data showed.

Optimistic outlook

However, over the longer term, industry sources said the outlook for the Asian jet fuel/kerosene market remains positive as air travel patterns continue to normalize into 2024.

A S&P Global outlook report released Oct. 24 noted that China's oil demand had mostly recovered to pre-COVID levels by August, with demand for jet fuel/kerosene, which was the last product to recover, reaching around 1 million b/d during the month.

"Although there is still room for international travel to grow from pre-pandemic levels, total aviation passenger turnover, including both domestic and international, have largely returned to pre-COVID levels," Grace Lee, Senior Research Analyst at S&P Global, said in an Oct. 24 outlook.

"Cross-border flights will take time to recover due to supply-side constraints, including flight availability and other issues like a weaker yuan, and further growth could come at the expense of some moderation in domestic travel . . . as a result, for now, we think economic issues, on top of seasonality and policy, will have more bearing on China's oil demand outlook," Lee added.

Market participants echoed similar sentiment, with some hopeful that further improvements in China's aviation sector will lend an overall boost to the region.

"For next year, the overall picture is that China will export less . . . that is what we have on our records for now, so there is a view that there will be more support than this year," a market participant said Oct. 25.

"China may still have some headwinds because economically they're not doing very well, but at least once their economy has stabilized, there will be more chance for demand to tighten up," the trader said, adding that while Asia's aviation sector has been lagging Europe in terms of recovery, the region could make significant strides toward bridging the gap in 2024.

The stabilization of China's economy is being watched closely, with Chinese President Xi Jinping making an unprecedented visit to the country's central bank, SPI Asset Management Managing Partner Stephen Innes said in an Oct. 25 note.

"Xi's visit to the People's Bank of China was a sign that the Chinese Communist Party is increasingly concerned about the economy and might enact significant stimulus measures," Innes said. "This was especially significant following news that Beijing planned to approve approximately Yuan 1 trillion ($136.77 billion) in additional sovereign debt issuance, with the proceeds allocated for various infrastructure projects."