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Southwest to United Boosted as Jet-Fuel Price Rally Fades

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 1.6 cents to $2.8552 a gallon at 1:09 p.m. on the New York Mercantile Exchange. The airlines index gained 2.6 percent.

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

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