Larger Inter-Regional Price Spreads to Revive Jet Fuel Arbitrage Discussions
The price spreads for jet fuel between Northeast Asia versus Northwest Europe and the U.S. West Coast opened up at Wednesday’s closing, which may once again entice market players to restart arbitrage discussions while simultaneously diverting selling interest for swing barrels away from Asia to Europe.
The OPIS South Korea-USWC Netback Factor fell to a discount of $10.39/bbl on Wednesday, the lowest in two and a half months, sharply down from a discount of $3.82/bbl on Tuesday.
A negative value indicates that jet fuel prices in Northeast Asia may be lower than prices in USWC after factoring in freight costs, with a larger discount indicating lower prices in the former market.
Physical jet fuel prices were assessed at $84.09/bbl or 200.21 cts/gal FOB Korea as of July 2, OPIS data shows.
The freight cost to deliver 35,000 metric tons of clean petroleum products from South Korea to USWC is estimated at $1.75 million, according to a shipbroker. This is equivalent to 15.98 cts/gal.
This means that a calculated CFR Los Angeles price for 60,000 mt of jet fuel loading in South Korea is 216.19 cts/gal.
The physical jet fuel price in Los Angeles, which reflects barrels shipping on Kinder Morgan’s West Line pipeline system, was assessed at 248.17 cts/gal on July 2, according to OPIS data.
This translates to a difference of 31.98 cts/gal, which should be large enough for the arbitrage window to be considered open, according to a market source.
The July East West Exchange of Futures for Swaps value for jet fuel fell to a discount of $52.82/mt on July 2, the lowest in over 15 months, compared to a discount of $41.87/mt on July 1. The July EW EFS value fell further to a discount of $57.45/mt as of 10.28 am on Thursday.
However, the bullish sentiment in the European paper market was not seen in the physical market, with the cash differential for a CIF Northwest Europe cargo falling to $13.50/mt on July 2, compared to $29.50/mt on June 27, according to OPIS.
Meanwhile, the cash differential for a FOB South Korea cargo was assessed at a discount of $0.80/bbl or $5.96/mt on July 2.
The freight cost to deliver 90,000 mt of clean petroleum products from South Korea to the U.K. is estimated at $3.6 million, according to a shipbroker. This is equivalent to $40/mt.
This means the physical price spread between South Korea and Europe is around $76.91/mt, against a freight cost of $40/mt for 90,000 mt of jet fuel cargo, the market source confirmed.
However, the EW EFS value for August was narrower at a discount of $40.81/mt on Thursday morning, which will lower the calculated physical price spread to $60.27/mt, making it less attractive for any player looking to sell volumes delivering in August instead of July, the market source pointed out.
There has not been any new shipping fixture closed for jet fuel volumes to be loaded in Northeast Asia for delivery to Northwest Europe or USWC yet, the shipbroker noted.
On the other hand, there is a new shipping fixture for 90,000 mt of jet fuel to be loaded from India on July 7 for delivery to the U.K., the shipbroker said.
This is unsurprising as the sudden drop in EW EFS also means that the European market is now more attractive than the Asian market to South Asian sellers.
The bulk of India’s exports have been shipped to Europe instead of Asia since February, according to data provider Vortexa; this trend looks to be unchanged in the near future.
–Reporting by Kite Chong, kchong@opisnet.com; Editing by Mei-Hwen Wong, mwong@opisnet.com