Kate Mackenzie Volcano ash creates potential for yet more refining gloom

UK flight disruptions warning sign outside Heathrow airport - Steven SimpsonHow big will the effect of the Eyjafjallajökull volcano ash be on refined energy products?

Europe’s flight ban has already seen jet fuel prices fall, with Argus reporting them Monday as down about $20 – $25/tonne since Friday, with cargoes priced in the $723 to $732 range. Trade volumes were also up:

The European jet fuel barge market saw a flurry of deals on Monday, with 12,500t of product traded in the MOC window. Some airlines and traders are beginning to offload product before prices fall further. Lufthansa, Statoil, Shell and Glencore were the sellers while Morgan Stanley bough five barges.

Some estimates of the demand impact, from the FT:

Europe consumes about 1.2m barrels a day of jet fuel. The airspace shutdown following last week’s eruption of an Icelandic volcano could remove about three-quarters of this demand, or some 4.5m barrels from the continent’s projected petroleum demand this month, according to preliminary estimates by Eduardo López, senior oil analyst at the International Energy Agency in Paris.

Societe Generale’s Michael Wittner, meanwhile, has similar estimates (1.3m b/d of jet fuel, 80 per cent reduction from current outages), but says that adding the impact of cancelled long-haul flights into Europe could take it as high as 1.2m b/d.

In addition, he sees the flight ban affecting other refined product crack spreads — if the flight disruptions prove lengthy or recurring, this could be bearish for the products market overall.

In such a situation, refiners might try to blend jet fuel, which degrades relatively quickly, into diesel and gasoil.

Further increasing the output of those products, SG analysts write, refiners may also attempt to reduce their jet fuel yields, which averaged 6.7 per cent in OECD Europe last year.

Assuming runs are unchanged, this would result in less jet output, but more output of lighter products, such as gasoline, and heavier middle distillates, such as diesel and gasoil. This is what happened after September 11th.

Probably the last thing Europe’s refiners were hoping for, right now.

Related links:

In Depth: Volcanic ash disruption - FT
A continuing refining headache - FT Energy Source
Gasoline versus bimbos with big hair – FT Alphaville