Southwest to United Boosted as Jet-Fuel Price Rally Fades

November 8, 2013 by  
Filed under Wind Energy Tips

Southwest Airlines Co. (LUV) to United
Continental Holdings Inc. (UAL)
are benefiting as jet fuel prices
retreat from an eight-month high against diesel amid rising
output and the lowest seasonal demand in more than two decades.

Jet fuel was 5.88 cents a gallon below diesel on the Gulf
Coast, home to 51 percent of U.S. refining capacity, after
climbing in late October to the highest since February. Refiners
including Valero Energy Corp. (VLO), producer of about 12 percent of
U.S. jet fuel, plan to complete maintenance this month and add
to supplies that rose enough last week to fill the tanks of 816
Boeing 747 jumbos.

Lower fuel expenses have helped send the Bloomberg U.S.
airlines index up as much as 83 percent in 2013 to a six-year
high Nov. 4. The slide in prices comes as advances in drilling
techniques have unlocked oil from shale formations, lifting
domestic crude production to the highest in almost 25 years and
allowing refiners to run at record levels. Exports of the fuel
hit a high in August.

“Jet prices are coming off because less travel demand and
the return from refinery maintenance is bringing more supply,”
Harold York, principal analyst at energy consultant Wood
Mackenzie Ltd. in Houston, said by phone yesterday. “We’re
seeing export demand growth, but we’re producing much more than
we’re consuming.”

Lower Prices

From 2007 through 2012, jet averaged a 0.52-cent premium to
diesel on the Gulf. This year, that spread has averaged a 5.22-cent discount. The fuel has retreated after surging to 0.75 cent
a gallon below diesel on Oct. 28, the strongest level since Feb.
28, data compiled by Bloomberg show.

Ultra-low-sulfur-diesel futures added 0.32 cent to $2.8424
a gallon at 8:37 a.m. on the New York Mercantile Exchange. The
airlines index slipped 1.4 percent yesterday.

Southwest, the largest U.S. discount airline, said Oct. 24
that fuel costs were down 3.2 percent in the third quarter from
a year earlier as the company reported record third-quarter
profit. Tammy Romo, the carrier’s chief financial officer, said
yesterday that the airline would spend about $3 a gallon this
quarter, 9.6 percent less than last year. United, the nation’s
largest carrier, paid 2.2 percent less for fuel in the three
months through September.

Fuel is often an airline’s largest expense, accounting for
as much as a third of operating costs. Carriers have focused on
reducing consumption by replacing older aircraft with more-efficient models, adding special wing tips to reduce drag,
installing lighter-weight seats and removing unused galleys.

Refinery Rates

U.S. refiners boosted operating rates by an average of 1.1
percentage points in November and December during the past five
years, according to the Energy Information Administration. Jet
fuel demand in the week ended Nov. 1 tumbled 438,000 barrels to
1.23 million barrels a day, the lowest for the period in EIA
data going back to 1990.

“We don’t believe there’s any real strength to jet prices
or differentials,” Sabine Schels, a commodity strategist at
Bank of America Corp. in London, said by phone Nov. 5. “We see
production strong again after refinery maintenance and there’s
export demand, but ultimately, this is a market that just has
too much supply.”

Valero’s 100,000-barrel-a-day Three Rivers refinery in
Texas is nearing the end of a six-week turnaround, while Exxon
Mobil Corp. (XOM)
’s 503,500-barrel-a-day Baton Rouge plant, the
nation’s fourth-largest, is scheduled to finish repairs that
began in mid-September.

U.S. refineries processed 15.5 million barrels a day of
crude and other feedstocks last week, the most for this time of
year in a decade, EIA data show.

Higher Production

Jet fuel production rose 44,000 barrels to 1.48 million
barrels a day last week, 10 percent above the five-year average,
according to the EIA, the statistical arm of the Energy
Department. Stockpiles of the fuel climbed to 39.5 million
barrels.

While U.S. consumption is forecast to contract through
2013, regions like Europe and Latin America are benefiting from
“healthy” U.S. jet supplies, according to an Oct. 30 report by
Bank of America analysts including Schels.

U.S. jet fuel exports averaged 152,000 barrels a day this
year through August and are heading for an annual record in
2013, according to the EIA. Shipments from the U.S. Gulf surged
to an all-time high of 161,000 barrels that month, four times
the volume that left the region a year earlier.

Exports Rising

“We’re seeing more and more volumes increasingly heading
out of the Gulf Coast,” Soozhana Choi, Deutsche Bank AG’s head
of energy research in Washington, said by phone Oct. 31.

Jet rallied versus diesel in October as declining
environmental costs enticed refiners to produce more gasoline
and diesel and helped cut jet output to the lowest since March.

Renewable Identification Numbers, certificates attached to
each gallon of ethanol that are submitted to the government and
used by refiners to comply with the environmental standards,
sank to 26 cents yesterday from a record $1.43 in July. Credits
for advanced fuels including biodiesel sank to 34 cents.

The U.S. Environmental Protection Agency may cut
requirements to 15.21 billion gallons for renewable fuels,
including ethanol and biodiesel, in 2014 from 18.15 billion,
according to an internal proposal provided to Bloomberg.

Under a 2007 law, refiners must use a certain amount of
those fuels each year, with their target determined by their
share of the market, either by blending biofuel or by purchasing
RINs. Jet fuel, unlike gasoline and diesel, doesn’t carry a RIN
obligation.

Huge Inconvenience

“RINs are a huge inconvenience for refiners so they’re
going to look at these prices and try to figure out how to
maximize profits,” said David Dunn, an analyst and broker at
Progressive Fuels Ltd. in Naples, Florida, by phone Oct. 30.

U.S. jet fuel production rose to 1.67 million barrels a day
on Aug. 30, the highest level in more than a year, leading to a
stockpile surge through September.

Spokesmen for refiners including Tesoro Corp. (TSO), PBF Energy
Inc. (PBF)
, Royal Dutch Shell Plc (RDSA), BP Plc (BP/), Chevron Corp. (CVX) and Exxon
declined by e-mail to comment on jet-fuel output as it related
to RINs and environmental exposure.

Exports from the U.S. are rising as international airline
passenger demand grew 5.7 percent in September from a year
earlier, according to the International Air Transport
Association based in Geneva.

Middle East

Demand from Middle East carriers gained the most, surging
10.4 percent from a year ago. Latin American airline traffic
jumped 8.3 percent, according to an Oct. 31 statement. European
traffic rose 3.4 percent, while North America saw the lowest
growth at 2.3 percent.

“For U.S. carriers, international air transport demand has
a stronger growth rate than domestic air transport demand,”
John Heimlich, chief economist for Airlines for America, a
Washington-based trade group representing airlines including AMR
Corp. (AAMRQ)
’s American Airlines, Delta Air Lines Inc. (DAL) and US Airways
Group Inc. (LCC)
, said by phone Nov. 1.

Shipments to Canada, which has historically received the
largest share of U.S. jet-fuel exports, doubled in August, EIA
data show. Deliveries to Nigeria surged 59 percent to a record
46,000 barrels a day, making the country the second-largest
importer.

“You’re seeing products en route to Asia, Africa and Latin
America,” Choi said. “This is a sign of a rising product
surplus looking for sources.”

To contact the reporters on this story:
Christine Harvey in New York at
charvey32@bloomberg.net;
Lynn Doan in San Francisco at
ldoan6@bloomberg.net

To contact the editor responsible for this story:
Dan Stets at
dstets@bloomberg.net


JetBlue's Barger on Fleet Restructuring, Strategy

Oct. 29 (Bloomberg) — Dave Barger, chief executive officer of JetBlue Airways Corp., talks about the company’s pricing and costs, fleet restructuring and growth strategy.
JetBlue delayed delivery of some Embraer SA jets, the smallest in its fleet, and ordered 35 Airbus SAS aircraft valued at $4 billion as the carrier focuses on larger, more-efficient planes. Barger speaks with Stephanie Ruhle and Sara Eisen on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

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