EIA reports increased jet fuel crack spread in the US

Although jet fuel demand and production both remain below 2019 average levels, lower inventories and relative increases in demand have contributed to the increasing jet fuel crack spread (the difference between the price of a barrel of jet fuel and a barrel of crude oil) since early July 2021. For the first time since the broader rollout of COVID-19 vaccinations began in February 2021, jet fuel crack spreads were briefly higher than the 3-2-1 crack spread at the US Gulf Coast (USGC) in early November 2021, and now remain near equal levels. The 3-2-1 crack spread is a measure of the overall profitability of refineries calculated by subtracting the price of a barrel of crude oil from two-thirds the price of a barrel of gasoline and one-third the price of a barrel of diesel. New concerns about the potential impact of the COVID-19 Omicron variant have already prompted precautionary new restrictions on international travel. Reports of the variant contributed to a 12% decrease in the Brent crude oil futures price on 26 November 2021, and concerns over the variant spreading are likely to contribute to reduced demand for jet fuel, in particular, which may also put downward pressure on the jet fuel crack spread.

High summer jet fuel inventories reflected increased refinery production during a period in which increasing market demand for gasoline and distillate encouraged refiners to process more crude oil. Hurricanes along the Gulf Coast in August 2021 contributed to temporary refinery outages and reduced production, which brought inventories to more seasonally normal levels. Beginning the week ending 3 September 2021, inventories fell below the five-year average. Since then, weekly jet fuel inventories have remained below the five-year average except for the week ending 22 October 2021. The four-week average of US crude oil inputs to refineries have remained below 16 million bpd since the last week of August 2021 (as seen in Figure 1). Lower crude oil inputs in September and October 2021 reflect a seasonal trend of reduced refinery operations for maintenance. The reduced refinery production has also contributed to keeping jet fuel inventories relatively low compared with summer levels.

Jet fuel demand (measured as product supplied) has been well below average since the onset of the COVID-19 pandemic. In addition to elevated jet fuel production over summer 2021, jet fuel demand remained relatively low, further contributing to building inventories. However, jet fuel demand gradually increased from the start of the year through to August 2021 (see Figure 2). Beginning in July 2021 and through to November 2021, jet fuel consumption has been within 20% of 2019 levels, according to the ‘Petroleum Supply Monthly’ and ‘Weekly Petroleum Status Report’. In November 2020, for comparison, levels where at about half of what they were in 2019.

The trend in jet fuel demand is similar to overall trend in the number of passengers reported by the Transportation Security Administration (TSA). The rolling seven-day average air traffic passenger level has been within 30% of 2019 levels since June 2021, and it has remained within 15% since 20 November 2021. The narrowing gap to 2019 in late November is likely the result of increased travel for Thanksgiving as well as increased passenger travel as a result of reduced restrictions on international travellers to the US, which went into effect in November 2021. The number of passengers does not account for each passenger’s destination, total aircraft miles travelled, or the relative fuel efficiency of a given aircraft, which explains why the TSA passenger numbers are not directly comparable with our jet fuel product supplied data.

US air travel since the start of the pandemic has been more concentrated in domestic travel, which returned to pre-pandemic levels more quickly than international travel. Increasing domestic air travel during the December 2021 holidays could result in more US air travel and jet fuel demand through to the end of the year. At the same time, recent increases in COVID-19 cases and reported new variants could also lead to further restrictions on mobility or changes in consumer behaviour, and these factors are a downside risk to jet fuel demand. On a longer-term basis, consumer hesitancy, continuing intermittent restrictions on international travel, and reduced business travel may contribute to reduced jet fuel demand in 2022 and onward.

As a result of increased jet fuel demand since the summer, and of inventories below the five-year average, jet fuel crack spreads have gradually been increasing since early July 2021 (see Figure 3). A jet fuel crack spread approximates the profitability of refining jet fuel. The jet fuel crack spread at the USGC – the largest refinery region in the US by overall capacity – has gradually increased since early July 2021. Since 1 July, the USGC jet fuel crack spread increased from US$4.44/bbl to as high as US$15.61/bbl on 14 October. Since then, wholesale jet fuel prices at USGC have decreased relatively more than overall crude oil prices, contributing to a lower crack spread compared with mid-October. The jet fuel crack spread on 30 November was US$11.09/bbl, an increase of US$6.65/bbl compared with early July.

The increasing USGC jet fuel crack spread is also near the same value as the USGC 3-2-1 crack spread. Because gasoline accounts for about half of total US refinery production and diesel accounts for about one-third, the 3-2-1 crack spread is an indicator of the profitability of US refineries. Before 2020, jet fuel was considered a reliable source of value for refiners, and the jet fuel crack spread was frequently above or nearly equal to the 3-2-1 crack spread. Overall lower demand for motor fuels in 2020 caused both the jet fuel and 3-2-1 crack spreads to decrease in 2020. In 2021, increasing vaccinations and fewer mobility restrictions in the US contributed to increased 3-2-1 crack spreads beginning in February 2021. From February through to November, the 3-2-1 crack spread remained higher than the jet fuel crack spread, increasing to a gap as wide as US$10.55/bbl in early August. In early November, however, the relatively higher jet fuel crack spread, combined with decreases in the 3-2-1 crack spread, brought the two back to relatively similar levels. The jet fuel crack spread was slightly higher than the 3-2-1 crack spread on several days in early November.

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