Jet Cracks Soar to Record Highs as Iran War Breaks Fuel Markets

Fuel Market Disruption

Escalating conflict in the Middle East has triggered a significant surge in oil prices, but the premiums demanded for refined fuels are experiencing even more dramatic increases. The effective closure of the Strait of Hormuz is forcing Asian refiners to contemplate reducing throughput and curtailing export volumes, amplifying the strain on global fuel markets.

The refined product market is facing greater challenges than the crude oil sector, as hostilities disrupt both crude and fuel supplies. This has led to extraordinary increases in the premiums for jet fuel and diesel relative to Brent crude. The jet fuel market is experiencing the most acute stress, signaling potentially higher costs for airlines and consumers.

In Singapore, a key Asian hub, jet fuel prices have skyrocketed by 140% since February 27th, the day prior to the onset of the conflict. Prices have reached as high as $230 per barrel.

“If crude had tracked jet fuel’s proportional move, Brent would trade around $175,”

remarked Andon Pavlov of Kpler, highlighting the severity of the price divergence.

Record High Premiums

In Northwest Europe, jet fuel is trading at approximately double the price of crude oil. Assessments from Argus on Thursday showed jet fuel commanding an $88 per barrel premium over the North Sea Dated benchmark crude basket and a $91 premium relative to front-month ICE Brent futures.

The premium of jet fuel over crude, known as the crack spread or refining margin, has surged by over 350% compared to the previous year, reaching record highs, according to Argus data. While all refined product cracks have increased due to supply disruptions, jet fuel has experienced the most extreme price appreciation.

Supply Chain Vulnerabilities

Several factors contribute to the jet fuel price surge. Disrupted crude and product supply from the Middle East is a primary driver. The specific requirements for producing and storing jet fuel make the kerosene market particularly susceptible to sudden shifts in physical supply.

Additionally, Gulf producers' medium sour crude, facing restricted access out of the Strait of Hormuz, typically yields higher proportions of middle distillates like jet fuel and diesel compared to lighter grades from other regions. Refiners are now competing fiercely for alternative supplies, primarily lighter grades more suited for gasoline and naphtha production.

June Goh, Senior Oil Market Analyst for Sparta Commodities, emphasizes the unique challenges facing the jet fuel market:

“Jet fuel is currently the most stressed barrel…[it] has very specialized tank storage requirements and there isn’t much of it stored globally, unlike many other products such as diesel and gasoline.”

Asian refineries are reducing output as crude shipments are delayed at the Strait of Hormuz. Attacks on refineries in Bahrain and Saudi Arabia have further exacerbated the situation. Middle distillate exports from the Middle East are also bottlenecked in the Persian Gulf, tightening the global jet fuel market.

James Noel-Beswick, Head of Commodities for Sparta, notes that roughly a fifth of global jet fuel exports transit the Strait of Hormuz, twice the proportion of diesel, creating significant challenges for airlines in securing supplies.

Furthermore, jet fuel cannot be blended, unlike diesel, adding to the supply constraints.

Looking ahead, while a de-escalation in the Middle East could potentially moderate the extreme jet fuel premiums, crack spreads are expected to remain elevated as the market addresses current supply chain disruptions.

“Jet and diesel crack spreads are likely to remain elevated well beyond conflict resolution,”

Kpler’s Pavlov predicts, adding that gasoline risk is building into the summer demand season.