THE explosion in jet fuel prices in Asia is an early indicator that the economic pain of the war in the Middle East is about to become reality for energy consumers.
Jet fuel prices in Asia’s trading hub Singapore rocketed 72% to US$225.44 a barrel on Wednesday, a record high, on worries about future supplies given the disruption of about 20 million barrels per day (bpd) of crude oil and refined product shipments through the Strait of Hormuz.
The spot price of jet kerosene has now gained 140% since the close of US$93.45 a barrel on Feb 27, the day before the United States and Israel launched an aerial bombing campaign against Iran.
While US President Donald Trump is making some belated efforts to assure that tankers will be able to transit the narrow waterway that carries about one-fifth of global oil consumption, the market remains far from convinced.
Jet fuel is the part of the crude oil barrel most exposed to supply disruptions as it tends to have the lowest level of inventories given it needs to be stored in specialised tanks.
The surging spot price means that the profit margin for making a barrel of jet kerosene from Dubai crude has jumped to more than US$100 a barrel, a level that suggests market participants are expecting a severe shortage in the coming weeks.
The blowout in jet fuel prices is probably overdone, with levels far beyond what is justified even by a worst-case scenario of an extended effective closure of the Strait of Hormuz.
But it’s worth noting that there are increasing signs of stress in Asian refiners, with reports of some plants lowering operating rates to preserve crude stockpiles, while others bring forward maintenance.
India’s Mangalore Refinery and Petrochemicals (MRPL) has suspended fuel exports, two sources familiar with the matter said on Wednesday.
The state-run refiner, which runs a 300,000 bpd plant in the southern state of Karnataka, exports about 40% of its refined fuel output.
It’s likely that other refineries will follow MRPL’s lead, especially those in India, which sources the bulk of its crude from the Middle East and will battle to find alternative suppliers at short notice.
China has urged companies to suspend signing new contracts to export refined fuel, and to try and cancel shipments already committed, several industry and trade sources with knowledge of the matter said yesterday.
If confirmed this would dramatically tighten regional product markets as China is one of the few countries with spare refining capacity and a large stockpile of crude oil.
Medium crude shortage
It’s also worth noting that much of the oil not getting through the Strait of Hormuz is medium-sour crude, a grade prized for its higher yield of middle distillates such as jet kerosene and diesel.
Even if refiners can source alternative crudes from producers in Africa and South America, these grades tend to be lighter and therefore produce more light distillates such as petrol and naphtha.
This suggests that even when refiners can maintain processing rates, they may be forced to produce more light distillates than needed and not enough middle distillates.
The profit margin for producing a barrel of petrol, the building block for jet fuel and diesel, in Singapore jumped 30.4% on Wednesday to end at US$47.69.
It has more than doubled since Feb 27, when it ended at US$21.90 a barrel and is now at levels last seen in the aftermath of the February 2022 Russian invasion of Ukraine.
It won’t take long for these elevated margins to reach retail fuel prices in Asian countries with market pricing for products such as petrol and diesel.
A sharp increase in fuel prices will drive an inflation spike, dent consumer spending, put a pause on some capital investment and lead central banks to contemplate raising interest rates.
The wider problem is that even if there is a resolution to the Iran conflict within the coming weeks that results in the free movement of vessels through the Strait of Hormuz, the damage from the existing disruption is now locked into the supply chain. — Reuters
Clyde Russell is an Asia commodities and energy columnist at Reuters. The views expressed here are the writer’s own.
