Bloomberg: Asia's Jet Fuel Squeeze Threatens to Spread to Europe

The aviation fuel crisis that began in Asia is on course to reach Europe, according to reporting by Bloomberg. The news agency says the volume of jet fuel lost to the Iran war is simply too large for the world's refiners to replace, and that the shortfall is now colliding with the seasonal peak in travel demand.

Airlines from Vietnam to New Zealand have begun cancelling flights as prices hit record highs, Bloomberg reports, while China has curbed fuel exports to protect its own supply. Asia has been hit hardest because so much of its refining runs on crude that normally moves through the Strait of Hormuz, the chokepoint Iran has blocked. The European Union and the UK could be only weeks from comparable conditions, because they lean on refineries inside the Persian Gulf. Even in the United States, a net oil exporter, some regions depend on Asian supply, and carriers including United Airlines have already dropped unprofitable services in response to high prices.

"You can't fly the same amount of flights without the same amount of jet fuel," Vikas Dwivedi, global energy strategist at Macquarie Group, told Bloomberg. If Hormuz stays shut, he said, more aircraft will be grounded in the coming weeks. Bloomberg adds that even a prompt reopening would leave weeks or months of repair work in the supply chain.

The pressure on aviation is unusually sharp. Total jet fuel demand, including kerosene, ran at 7.8 million barrels a day last year, Bloomberg reports. With the Gulf effectively closed, a meaningful share of global shipments is stranded, and Asian refiners have cut runs for want of Middle Eastern crude. Traders and analysts quoted by Bloomberg expect the gap to be closed by some mix of fewer flights and drawdowns from stockpiles. Members of the International Energy Agency have so far agreed to release 400 million barrels, but the overwhelming majority of that is crude; on past form, only a small fraction of any refined product released reaches the aviation pool. Jet fuel prices have set records, with some costs doubling since the start of the year, outrunning gains in crude and most other products.

That tightening is the same market in which Malta- and Geneva-based trader Alkagesta operates. Bloomberg reported in February that the firm had begun supplying jet fuel through Europe's NATO Central Europe Pipeline System, the NSPA-overseen network that carries roughly 225,000 barrels a day of product to military airbases and civilian airports across the continent. In April, Bloomberg quoted Alkagesta founder and chief executive Orkhan Rustamov describing how extra military-grade barrels injected at Rotterdam displaced civilian jet fuel in that same system, reducing deliveries to hubs including Frankfurt. Read together, the two strands describe one problem: fewer barrels arriving into Europe, and a pipeline where military requirements take priority when they do.

For European airports the margin for error is thin. The German airport association ADV has warned that jet fuel supply in Europe is coming under increasing pressure and that airports are directly exposed to supply risk without controlling price or supply chains. Ryanair has said suppliers are guaranteeing shipments only into mid-May, and Eurocontrol traffic data shows European schedules still building into the summer season. Physical traders expect May to be tighter than April.