Increasing Midwest and Gulf Coast refinery production contributes to high jet fuel inventories
Increasing U.S. air travel since the beginning of 2021 has contributed to increases in demand for kerosene-type jet fuel in the United States. However, the pace of the increases in jet fuel product supplied (a measure of demand) has, so far, been slower than product supplied increases in other refined petroleum products, particularly motor gasoline and distillate fuel oil. U.S. refineries have increased crude oil inputs (refinery runs) to increase gasoline and distillate fuel oil production in order to meet increasing demand. As a result, jet fuel production has also increased. However, relatively less jet fuel is being withdrawn from inventories, and U.S. jet fuel inventories have increased since May 2021. While inventory levels in the Rocky Mountains (PADD 4) and the West Coast (PADD 5) have been decreasing and are near their previous five-year (2016–2020) averages, inventory levels in the East Coast (PADD 1), Midwest (PADD 2), and Gulf Coast (PADD 3) have been increasing and are near or above their five-year highs.
Recent trade press reports that logistical constraints are limiting the movement of jet fuel from primary inventories to points of consumption in the western regions (the Rocky Mountains and West Coast). Product supplied of jet fuel is often used as a measure of demand, but the measure only reflects withdrawals of jet fuel from the primary supply chain. Infrastructure constraints, such as limited pipeline or trucking capacity, restrict the volume of jet fuel that can be moved from terminal supplies to consumers, particularly those at more remote destinations. As a result, some flights are reportedly being delayed or canceled because of a lack of jet fuel. Ongoing logistical challenges may continue to affect inventories and product supplied.
As of July 23, U.S. total jet fuel inventories were just over 45 million barrels, 9.9% higher than the five-year average for that week and 7.2% higher than the five-year high (Figure 1). Meanwhile, gasoline and distillate fuel oil inventories on July 23 were below their five-year averages by 0.6% and 6.8%, respectively. The current U.S. inventory levels for gasoline and distillate fuel oil reflect a relative balance between increasing refinery production and rising demand for transportation fuels. As the number of vaccinated people increases, economic activity increases, which, in turn, increases demand for gasoline and distillate fuel oil. In addition to more vaccinated people, vehicle miles traveled (VMT) has also likely increased compared with 2020 because of rising recreational activity and loosening restrictions on mobility. Airline travel in the first half of 2021 has also increased compared with 2020, but the four-week rolling average for U.S. jet fuel product supplied as of July 23 was 1.5 million barrels per day (b/d), still 14.8% less than the 2015–19 average for the same week.
Less jet fuel being pulled out of wholesale infrastructure, whether as a result of jet fuel infrastructure constraints or lower air traffic demand, is not the only factor contributing to higher jet fuel inventories. U.S. refinery production of jet fuel largely follows the trend set by overall refinery runs. Gradually rising demand for gasoline and distillate fuel oil in 2021 has increased incentives for refinery production, which has contributed to increased refinery runs intended to raise production levels of both fuels. Increasing refinery runs also contributed to increasing production of jet fuel, which has resulted in higher inventory levels (Figure 2).
Refiners can make technical adjustments when refining crude oil to alter the slate of finished petroleum products. A refinery’s unit capacities, along with the slate of crude oil grades that it feeds into its distillation units, determine its potential yield of each given product per barrel of crude oil input. However, refiners still face technical limitations as to the degree to which they can adjust their production, and reducing the yield of a given product to 0% is effectively impossible. Process streams that shift product out of the jet fuel pool and into the motor gasoline and distillate fuel oil pools are limited by secondary unit capacity (such as desulfurization), which is needed to bring the fuel into compliance with fuel specifications such as sulfur content limits. As the overall volume of crude oil being refined increases, secondary processing capacity mechanically constrains how much jet fuel production can be redirected into the motor gasoline or distillate fuel oil pools, resulting in rising jet fuel yields as crude oil runs increase.
Since the World Health Organization declared that COVID-19 was a global pandemic, demand for jet fuel has been affected more severely than demand for motor gasoline and distillate fuel, and refiners have since adjusted their refining to reduce jet fuel yield. In May 2020, the refinery jet fuel yield decreased to its 2020 low point of 3.6%, while at the same time, overall refinery runs decreased to as low as 12.4 million b/d (Figure 3). The jet fuel yield has increased steadily since May 2020, although this increase is likely a result of overall increasing refinery runs. As of July 23, the average jet fuel yield on net crude oil inputs for the U.S. refinery fleet was 9%, almost 3 percentage points higher than the same time in 2020, but still nearly 2 percentage points lower than the 2015–19 average for the same period.
Low jet fuel crack spreads provide a financial incentive for refiners to reduce their jet fuel yield. Crack spreads are a measure of refiner profitability; the crack spread for jet fuel is calculated by taking the price of a barrel of jet fuel and subtracting the price of a barrel of crude oil. Since the start of the year, jet fuel crack spreads have remained relatively low. The New York Harbor jet fuel–Brent crude oil crack spread was $8.18 per barrel (b) as of July 27, compared with $7.95/b on January 1. The U.S. Gulf Coast (USGC) jet fuel–Light Louisiana Sweet (LLS) crude oil crack spread was $7.52/b on July 27, compared with $5.62/b on January 1. Since January 1, the USGC 3-2-1 crack spread (using LLS) increased from $6.77/b to $15.65/b as of July 27 (Figure 4). The 3-2-1 crack spread serves as an indicator of overall refinery profitability by combining the value of two-thirds of a barrel of gasoline and one-third of a barrel of diesel before subtracting the price of a barrel of crude oil.
The rising 3-2-1 crack spread suggests rising overall refinery margins that are driven by rising demand for gasoline and distillate fuel oil. The lower relative crack spreads for jet fuel, however, suggest that jet fuel production has not increased in profitability in step with other fuels. Because the crack spread is based on a spot market price for jet fuel, infrastructure costs associated with transporting jet fuel to its final point of consumption are not accounted for in the jet fuel price or crack. Outside of pandemic conditions, refiners often consider jet fuel to be a relatively high-value product, and the jet fuel crack spread is often at a higher value than the 3-2-1 crack spread. For example, the USGC jet fuel crack spread was higher than the USGC 3-2-1 crack spread for all but two days in 2019.
International trade in jet fuel is the last important factor in determining the overall balance of jet fuel inventories. Because of the global nature of the COVID-19 pandemic, international demand for jet fuel is substantially lower than pre-2020 levels, and exports of jet fuel have remained at or below the 2015–19 low for most of 2021 (Figure 5). Jet fuel imports into the United States have not deviated substantially from five-year average levels during the year, but lower jet fuel exports have contributed to higher net imports (imports minus exports), resulting in additional jet fuel supply and further contributing to higher U.S. inventories.
U.S. average regular gasoline and diesel prices decrease
The U.S. average regular gasoline retail price decreased nearly 2 cents to $3.14 per gallon on July 26, 96 cents higher than the same time last year. The Midwest price decreased 3 cents to $3.03 per gallon, the Gulf Coast price decreased nearly 3 cents to $2.81 per gallon, and the East Coast price decreased more than 1 cent to $3.01 per gallon. The Rocky Mountain price increased nearly 4 cents to $3.60 per gallon, and the West Coast price increased less than 1 cent, remaining virtually unchanged at $3.88 per gallon.
The U.S. average diesel fuel price decreased less than 1 cent, remaining virtually unchanged at $3.34 per gallon on July 26, 92 cents higher than a year ago. The Midwest price decreased nearly 1 cent, remaining virtually unchanged at $3.26 per gallon, and the Gulf Coast and East Coast prices each decreased less than 1 cent, remaining virtually unchanged at $3.08 per gallon and $3.31 per gallon, respectively. The Rocky Mountain price increased more than 1 cent to $3.65 per gallon, and the West Coast price increased nearly 1 cent, remaining virtually unchanged at $3.93 per gallon.
Propane/propylene inventories rise
U.S. propane/propylene stocks increased by 1.9 million barrels last week to 64.5 million barrels as of July 23, 2021, 10.7 million barrels (14.2%) less than the five-year (2016-2020) average inventory levels for this same time of year. East Coast, Midwest, and Rocky Mountain/West Coast inventories increased by 1.0 million barrels, 0.6 million barrels, and 0.2 billion barrels, respectively, and Gulf Coast inventories increased slightly, remaining virtually unchanged.