The uncharacteristic premium of Gulf Coast ultra low sulfur diesel to jet fuel is starting to narrow as refiners switch to making more ULSD to meet export demand and jet fuel demand has picked up lately from holiday demand.
Jet fuel, which is typically at a premium to ULSD, has been at a discount every day for almost two months due to weak jet fuel demand and increased exports for ULSD. The ULSD to jet premium stretched as wide as 9 cents/gal on October 25, when the outright price of ULSD was $3.0562/gal and jet fuel was $2.962/gal.
On the year as of October, US jet fuel demand was down 1.2% from last year, according to monthly American Petroleum Institute data released Friday. Jet fuel use by domestic and international flights hit 1.41 billion gallons in September, down from 1.42 million gal in September 2011 and 1.51 million gal in August, the US Bureau of Transportation Statistics said in its monthly report on Thursday.
"Jet demand has been very weak -- that's the reason for the bigger gap," a Gulf Coast distillate trader said of why jet fuel has been at such a discount to ULSD this fall. "As for ULSD, the incentive to export is stronger because of the arbitrage to Europe and demand from Latin America."
Though average production of ULSD for October and November of this year is 167,000 b/d more than the same time period last year, stocks are averaging 9.9245 million barrels less, a sign of strong exports.
"I am thinking it is mainly driven by exports of ULSD," a second trader said.
Though the jet differential typically falls in late December due to end-of-year tax selling, often leading to a discount to ULSD, the discount is rarely seen this early, said traders.
"It is usually only in December," a third trader said.
Steadily, the premium between ULSD and jet has been narrowing in the past two weeks. By Wednesday, the spread had narrowed to 1.7 cents/gal, the lowest it has been since September 26, when it was 1 cent/gal.
Traders said jet fuel demand has shown an increase in recent weeks due to holiday traveling. US Jet fuel demand was up 1.9% in October, according to the API data.
"Jet is picking up globally as well," the first trader said.
Additionally, as the spread between ULSD widened, refiners shifted to making more ULSD and less jet fuel, a trader said. Gulf Coast ULSD stocks increased 1.667 million barrels in the week ending November 9 to 27.202 million barrels while jet fuel stocks on the Gulf Coast decreased 644,000 barrels to 14.200 million barrels.
