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Update Jet Fuel Price premium collapse & demand destruction

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Charles Randall

<Here is update on demand destruction Jet Fuel, Price Premium collapse & eventual cascade into diesel price drop as mentioned in previous articles – CER>
Jet Fuel Premium Collapse as Airlines Ground Fleets Weakens Oil

By Robert Tuttle
     July 14, 2008 (Bloomberg) — Jet fuel’s 100 percent rise over the
past year to a record $4.36 a gallon is setting the stage for
its decline in the next six months.
     AMR Corp.’s American Airlines Inc. and UAL Corp.’s United
Air Lines Inc. are among carriers readying their biggest cutback
in fuel use since 1991 because of the price. The U.S. airline
industry plans to ground 413 aircraft, eliminating 8.8 percent
of seating capacity
as increasing fuel costs spur losses of as
much as $13 billion, the Air Transport Association says.
     Fuel demand will fall 7.5 percent this year, or 95,000
barrels a day, and 104,000 barrels a day in 2009, according to
the U.S. Energy Department. That will spur as much as a 90
percent decline in the fuel’s premium to heating oil futures,
said Mike Busby, manager of oil and refined-products trading for
Northville Industries Corp. in Melville, New York.
     “People are responding to a doubling of prices and the
airline industry is one industry that is responding,” said
Edward Morse, chief energy economist at Lehman Brothers Holdings
Inc. “The markets will weaken significantly after the third
     The decline in airline fuel consumption parallels the drop
in gasoline sales to a five-year low as drivers take vacations
closer to home and use mass transit
. Crude oil declined 35
percent in the three months after Sept. 11, 2001, a time when
airline traffic plummeted 30 percent.
     Jet fuel, along with diesel, is traded at a differential to
heating oil futures because the fuels are made from similar
components of crude oil at the refinery. Jet fuel, a form of
kerosene used to power jets, sold for 20 cents a gallon more
than the heating oil contract in the New York Harbor market on
July 11, more than twice the average during the past five years
The fuel’s premium should decline to 2 to 8 cents a gallon by
the fourth quarter, Busby said.

                          Price Decline

      The airline cutbacks “should help bring the price down,”
said Peter Beutel, president of energy consultant Cameron
Hanover Inc. in New Canaan, Connecticut. The current premium is
because of “more than anything the summer demand, the peak
     In 1991, when U.S. jet fuel consumption slid 8.2 percent,
crude oil fell 40 percent from a high of $32 a barrel in January
to $19.12 by the end of the year. Jet fuel traded at a 1.55 cent
discount to heating oil by Dec. 11 of that year, down from a
3.85 cent premium six months earlier.
     Lehman Brothers expects crude oil to average about $90 in
the first quarter of next year. Oil climbed to a record $147.27
a barrel on July 11 amid rising fuel demand in China and India,
and the potential threat of an Israeli air strike on Iran.
Airline cutbacks may help send the price to $107 a barrel in
2009, Merrill Lynch & Co. said in a July 7 report.

                          Falling Demand

     Demand for oil will be less than half of initial forecasts,
increasing by 616,000 barrels a day, because of the slide in
transportation use, Merrill Lynch said.
     Jet fuel rose 3.92 cents to $4.2766 a gallon in New York
Harbor on July 11. It’s gained 51 percent this year, outpacing
the advance in gasoline and diesel, and touched the record $4.36
on July 3.
     Heating oil for August delivery rose 3.92 cents, or 1
percent, to close at $4.0766 a gallon on July 11 on the New York
Mercantile Exchange, after reaching a record $4.1586 a gallon
earlier in the day.
     U.S. jet fuel consumption for the four weeks ended July 4
was 2.2 percent lower than a year earlier, according to Energy
Department data.

                         `Demand Destruction’

     “There is definitely demand destruction going on,” Sung
Yoo, an oil analyst at JPMorgan Chase & Co., said in a telephone
interview. “We could see a bit of a pullback of the entire oil
complex after the summer.”
     Last month, Northwest Airlines Corp. said it would ground
14 Boeing Co. 757 planes and Airbus jets during the final three
months of 2008. Overall, Northwest is reducing its domestic and
international flying by up to 9.5 percent, the airline said in a
regulatory filing.
     Airline cutbacks are part of a broader trend in which
higher fuel prices are reducing consumption. U.S. gasoline
demand in the four weeks ended July 4
averaged 9.3 million
barrels a day, down 2.1 percent from the same period a year
     The reduction in U.S. fuel consumption may not be
sufficient to reverse oil’s climb toward $200, said Adam
Sieminski, chief energy economist at Deutsche Bank AG. “The
difficulty is that demand is still rising in China and the
Middle East and the rest of the world” while oil production may
be leveling off, he said. “What price does it take to have
demand growth go to zero to match zero supply growth? That’s
very scary because it might take a really high price.”

                         Overseas Expansion

     While U.S. airlines cut back, some carriers overseas are
, “soaking up demand reductions achieved in the United
States,” Merrill Lynch said in a July 4 report.
     Exports of the fuel for the first four months of the year
averaged 55,000 barrels a day, the highest since 2005, U.S.
Energy Department data show. For the week ended July 4, U.S. jet
fuel imports fell to 34,000 barrels a day, the lowest since Aug.
19, 2005.
     The narrowing of jet fuel’s premium to heating oil may be
limited if refiners don’t increase crude processing rates
Beutel, the energy consultant, said.
     “One of the biggest factors here is the simple inability
of refiners to bring up their runs,” he said. “We are still
below 90 percent and that is unheard of.”

                         Operating Rates

     Refiners have operated at an average of 86.4 percent
capacity this year, the lowest since 2001,
Energy Department
data show. U.S. jet fuel production averaged 1.62 million
barrels a day, 3.5 percent lower than a year earlier and
inventories of 38.8 million barrels were 6.1 percent lower than
a year earlier.
     The airline cutbacks also may not be as bad as expected,
said Jason O’Connor, head of refined products trading at
Starsupply Petroleum, a division of GFI Group Inc., in Norwalk,
     “With the airlines, a lot of this could be political
posturing,” he said.

–Editor: Dan Stets, Steve Bailey
To contact the reporter on this story:
Robert Tuttle in New York at +1-212-617-3465 or

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