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<span/>The SARS-CoV-2
pandemic has negatively affected all forms of global mobility, but
none more so than air travel. Not only is commercial air travel
inherently incompatible with the tenets of "social distancing", but
it is also more "discretionary" than other forms of mobility. As a
result, global jet fuel demand has collapsed since the pandemic
began, with April consumption down more than 70% from the year
before.
And for the same reasons mentioned above, jet fuel demand will
not return as fast as that for other products. IHS Markit expects
that global jet fuel demand will still be down some 22% during
4Q20, whereas gasoline and diesel will have recovered to within
around 5% of the previous year's level.
The asymmetry of the recovery in demand for different products
poses a problem for the world's refiners. Reducing throughput to
align with the lower jet fuel demand would leave the world short on
gasoline and diesel, while ramping up throughput to keep pace with
gasoline and diesel demand (absent any other operational
adjustments) would result is a large jet fuel surplus. Clearly,
supply and demand need not align completely since some excess jet
fuel volumes can go into storage. However, the scope and length of
the demand imbalance leave no other solution: the world's
refineries must collectively and dramatically reduce their jet fuel
yield fraction.
Figure 1: Implied global jet fuel fraction
The most readily available method for refineries is to split
their jet fuel (or "kerosene") stream into its lighter and heavier
ends. The light-end kerosene has properties similar to naphtha (a
principal gasoline building block) while kerosene's heavy cut is
more akin to diesel. There are several ways a refinery can split
its kerosene stream, though the degree to which it can achieve this
target depends heavily on its internal configuration.
The ease with which a refinery can dispose of its light- and
heavy-end kerosene also varies. Light-end kerosene, in particular,
is not an ideal fit for the gasoline pool due to its low octane
level and high boiling point. Blending light-end kerosene into the
naphtha stream used as feedstock for a steam cracker is a better
option - though that, of course, requires the refinery have access
to a steam cracker. Meanwhile, heavy-end kerosene aligns more
closely with diesel, but the proportion at which it can be blended
will depend on the local fuel specifications and the type of crude
used to create it.
At the end of the day, though, the jet fuel demand imbalance is
not an insurmountable problem for the refining industry. More
complex refineries, those with petrochemical integration, and/or
those that run the right types of crude have a relatively good
ability to adjust down their jet fuel fraction via blending with
the naphtha and diesel pools. In the US, for example, the refining
industry has managed to bring its jet fuel fraction down from 11%
at the beginning of the year to just 3.6% during the month of May.
The diesel fraction, meanwhile, has risen from 30% to closer to
40%, confirming that much of the excess kerosene was indeed blended
into the diesel pool.
Figure 2: US jet fuel fraction
However, the solution of trading jet fuel for diesel has only
created another problem: too much diesel. And sure enough, diesel
cracks have declined sharply, falling from $13.5/b in April for
Houston ULSD to $3.9/b this month. Of course, even with refineries
leaning away from jet fuel, cracks for that product also fell
dramatically this month, dipping below zero in most major markets.
This underscores the challenge faced by refiners during the current
crisis: given the depth and breadth of the demand destruction,
there is simply no avoiding a low margin.
Understand changing dynamics in the oil refining and marketing
value chain around the world with IHS Markit energy refining and
marketing outlooks, data and analysis: Learn
more.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
and can be tailored to focus on your areas of inquiry. Book in a
consultation with Rob Smith.
Rob Smith is a Director in IHS Markit's Refining and
Marketing group.
