Shale’s Surge Could Cause Problems for Jet Fuel

(Bloomberg) -- Airlines take note: America’s surging shale oil production is bringing with it ever more jet fuel.

The combination of rising output of the petroleum product in the U.S. and expansion in refinery capacity in Asia has led to a growing surplus just as the northern hemisphere summer peak period approaches. That’s pushing down margins on the fuel, which usually fetches a bigger premium to crude than diesel or gasoline.

Jet fuel is viewed by the International Energy Agency as a major driver of demand growth in the oil market due to growing passenger numbers in nations including China and India. Still, the shift toward lighter U.S. shale crudes has boosted the proportion of jet fuel produced by refineries to multi-year highs at the nation’s key refining hub on the Gulf Coast and in the U.K., Energy Aspects said in a report emailed on April 17.

“If the crude slate is lightening, then you’ll get more light products including jet fuel,” said Fiona Rutherford, an independent consultant with more than 25 years of experience in the refining industry, including at Royal Dutch Shell Plc.

The U.S. is currently producing about 300,000 barrels a day more than a decade ago, Energy Information Administration data show. The growth alone is equivalent to about 4 percent of global demand. Airlines may struggle to reap immediate benefits from weakness in the market because they typically hedge against the risk that one of their biggest costs will increase. The falling premium to crude will help to damp the impact of rising oil prices.

The jet fuel surplus in the U.S. and northwest Europe is being compounded by rising supply in Asia and the Middle East. Demand in those regions isn’t keeping pace with growth in supply, prompting refiners to ship rising volumes of fuel to the Atlantic Basin. China is among nations where refiners are adding capacity and a first batch of export quotas, followed by a subsequent adjustment, point to increased outflows.

China’s surplus could rise to 366,000 barrels a day in the fourth quarter, more than enough to meet the combined needs of Germany and Italy, according to Energy Aspects and data from the International Energy Agency. China, which boosted shipments in March, was a net importer in 2011.

“A good chunk of the growth in Chinese crude runs is making its way to
export markets as clean fuels, and a continuation of this in the months ahead could serve as a significant source of pressure in the regional market going forward,” JBC Energy said Wednesday. It estimates China’s exports of jet fuel rose by 100,000 barrels a day in March from a year earlier.

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