Thirst for Jet Fuel Dries Up Supplies in Europe and Asia

The allied war machine’s voracious thirst for jet fuel has turned Saudi Arabia into a net importer of the product, sucked excess supplies out of world markets and raised prices, especially in Europe and Asia, oil traders and industry analysts said.

But U.S. supplies of jet fuel are running ahead of last year, mainly because of the precipitous falloff in commercial jet flights. “There’s no shortage of jet (fuel) worldwide, but more a matter of geographical dislocations because of sudden demand in the Middle East,” one industry source said.

The tight market is particularly significant for Asian nations where it’s winter and where jet fuel kerosine is the principal fuel used for home heating and cooking. “The traditional sources of imports for Japan and especially for the Indian subcontinent are effectively dried up,” said Thomas A. Wallin, group editor of the industry newsletter Petroleum Intelligence Weekly.

Though supplies are available, the demand for jet fuel and other refined products has pushed prices up in markets in Asia and Europe, and refineries in those parts of the world are posting huge profits as crude oil prices remain relatively low, traders said.

On Friday, jet fuel was commanding a spot price of around $29 a barrel in Houston, but $39 to $41 a barrel or more in Singapore, the Mediterranean and Northwest Europe, according to Telerate Energy Services.

With crude oil prices at their lowest levels since August, refineries that buy the oil are earning $5 to $12 a barrel for jet fuel and diesel, compared to $2 a barrel during normal times, traders said.

Officials have not released information on how much fuel allied aircraft, which have flown about 16,000 sorties over Iraq, are consuming.

But traders estimate that the Saudis are seeking to import 200,000 to 400,000 barrels a day above their own production of 350,000 to 400,000 barrels a day--most of which goes directly to the war effort. The need is exacerbated by an accident late last year at the world’s largest refinery at Ras Tanurah, Saudi Arabia, where production has been halved, analysts said.

The state-owned Saudi Arabian Marketing and Refining Co., or Samarec, which is normally a net exporter, has suspended shipments of refined products out of the country, observers said.

“They’ve been buying for quite some time, starting at least a month ago,” said Roger Benedict, managing editor of Oil Market Listener, an electronic market analysis service. “They’re scooping up all the jet fuel and diesel fuel they can find, not only in the open market, but directly from the major oil companies.”

The Saudis, through Samarec, and the U.S. Department of Defense are the principal buyers of jet fuel for the military, traders said.

In mid-January, the Saudis and the U.S. military put out a request, or “tender,” for 3.5 million barrels of jet fuel for arrival in February in the Persian Gulf, one oil trader in Singapore said Friday.

Earlier in the month, a call went out in Europe for roughly 3 million barrels of jet fuel and 1 million barrels of diesel fuel, including two months’ worth of storage on the tanker vessels delivering the products either to the Saudi Arabian ports of Yanbu on the Red Sea or Jubail in the Persian Gulf, said Tim Durkin, an oil trader at the London firm Mark Petrograde Ltd.

“Their tanks are essentially full,” Benedict said. “Now they’re storing fuel in floating storage in tankers in the gulf and the Red Sea.”

Such tenders are only a suggestion of the magnitude of the allied defense forces’ needs for fuel, traders said: Several sellers could answer a single tender offer, and the allies might buy every one.

“They’re being cautious about how they’re approaching the market now,” Durkin said. “They don’t want to offset it too much . . . and drive the price up.”

European supplies are believed to be tight, particularly in the Mediterranean, where the Saudis have sought supplies of jet fuel because of their proximity to the war zone.

In Asia, Japan and South Korea are less affected by the supply situation, having built up sizeable inventories of products in anticipation of a war, analysts said. In addition, Japanese refineries are running flat out and a relatively mild winter has reduced demand below normal.

More severely affected are India, Pakistan, Bangladesh and Sri Lanka, nations with low inventories.

The allied forces’ demand also is high for diesel, the principal fuel for trucks and some tanks, and that demand is expected to skyrocket once a ground offensive begins. Diesel fuel, called gas oil in Europe, is used for home heating and cooking there.

Complicating the supply situation is the fact that both Europe and Asia depended heavily on imports of jet fuel and other refined products from Kuwait, which were cut off after Iraq invaded that country in August.

Refiners on the West Coast of the United States are expected to meet some of that need, although sailing times are long. But “it appears that various supplies scheduled for delivery in February to Japan have now been diverted to Saudi Arabia,” said an industry source.

On Jan. 15, one major West Coast refiner shipped the Saudis a cargo of 250,000 barrels of jet fuel, a cargo that won’t reach its destination for a month.

Although prices for jet fuel and diesel are relatively high in Asia and Europe, they have come off their highs in September and October, when many users were filling their tanks in anticipation of war, traders said.

In the United States, jet fuel stocks were at 45.26 million barrels last week, well above the 35.5 million barrels at the same time last year, the American Petroleum Institute reported. Stocks of so-called distillates, including diesel and No. 2 home heating oil, were 119 million barrels, up from 111.8 million barrels a year ago.

Refineries in the United States pumped out a record amount of jet fuel in 1990, a year when demand for all petroleum products except jet fuel fell, the API said.

JET FUEL PRICES

Spot prices for jet fuel, per barrel, Jan. 25, 1991:

Houston: $29.08 to $29.19

Singapore: $40.10 to $40.50*

Northwest Europe: $39.84 to $40.52*

Mediterranean: $41.06 to $41.34*

* Freight on board: the cost at the port of loading, not including the cost of shipment elsewhere.

Source: Telerate Energy Service

MIDEAST UPDATE

* Mexico’s government petroleum monopoly assured clients--including the United States--that crude oil sales will not be affected by the Gulf War, despite strong anti-war sentiment in Mexico.

* The record plunge of more than $10 a barrel in oil prices after last week’s U.S.-led air blitz on Iraq caught many trading companies by surprise. The list of those believed to have lost millions of dollars includes some of the top trading companies--Phibro Energy Inc., J. Aron and Amerada Hess Corp.--oil industry sources said.

* The president of the American Petroleum Institute denounced moves in Congress to impose windfall profits taxes on the oil industry, saying industry profits seemed high in the fourth quarter mainly because they had been depressed a year earlier.

* U.S. Trade Representative Carla Anderson Hills said the Gulf War intensified the need to revive and successfully conclude world trade talks that stalled late last year.

* Underwriters at Lloyd’s of London cut war-risk insurance premiums on sea cargo shipped to or from Israel and Jordan.

* The head of Japan’s economic planning agency told Parliament that the nation’s economy could withstand the costs of the war--including higher oil prices--and continue to grow.

* Olympic Airways, Greece’s national airline, reduced domestic and international service and warned that it might go out of business as a result of the Persian Gulf War.