SNAP ANALYSIS: Slow decline in Asian infections reverse jet, gasoline bull trend

London, (Quantum Commodity Intelligence) - Asian jet and gasoline margins have retreated this week as optimism of a prompt return to demand of the fuel amid an ongoing outbreak of Covid-19 has given way to fears that the epidemic in India and Japan may take more time than initially expected to come under control.

Gasoline refining margins – a measure of the relative strength in price of the fuel versus crude - hit a four-day low on Tuesday, according to Quantum data, as reports of higher Indian exports of the fuel due to lower domestic demand swirled and as cracks in Europe hit a four-week low.

The 92 RON June crack, the benchmark for the fuel in Asia - fell to $6.03/b, according to Quantum data, the lowest level since last Monday as optimism of a return to demand has given way to concerns about vaccination rates in Asia.

The picture is similar when looking at expectations for air travel.

Jet fuel cracks started to reverse a three-week bull run on Tuesday, with June margins falling to $3.08/b, down for the third straight day and 25% off last week's high of $4.39/b.

Additionally, higher refinery utilization rates as plants return from second quarter maintenance has also eroded margins.

Higher crude?

One factor is a rise in crude prices, with the expectation now that a trickle, instead of a flood, of Iranian supply might hit the market amid tough negotiations about a new nuclear pact.

But it's the structure of the gasoline and jet market that unveils concerns about future demand for the transport fuels.

The June-July structure in gasoline cracks have flattened, with June and July both marked at $6.03/b.

That compares with last week when June margins were $0.17/b higher than July's – meaning demand for the fuel is expected to return later than initially planned.

And at the same time, the contango structure in the Asian jet kero market widened on Tuesday, after the US government warned the public not to travel to Japan as the Asian nation's government mulls extending travel restrictions that were due to end on Monday.

The June/July contango in the FOB Singapore swaps market fell to -$0.25/b on Tuesday, compared with -$0.10/b a week earlier, indicating weaker demand for more prompt loading dates.

Indeed, one spot deal was heard at -$0.50/b under the swaps curve on Tuesday, the lowest cash differential transaction seen in more than two months.

Slow decline

The change in structure has to be seen against the slow reduction in infections of Covid-19 across the region.

Indian infections are sharply down at a seven-week low, but they remain at 200,000 a day.

That's four times higher on a pro-rata basis than the UK and in a country where just 11% of people have received one dose of a vaccine.

While no other Asian country is seeing these levels of infections, there are concerns about the spread in many nations that have lower vaccination rates.

And those concerns are not just around poorer nations.

Japan has one of the lowest rates of vaccination among rich nations and, at 5.23%, is below the average for Asia and almost half of that of India.

Meanwhile, Thailand, southeast Asia's second biggest economy is implementing new restrictions after finding cases of the so-called "South African variant".

Next week, India's government is expected to reveal May's fuel demand figures, which are expected to be more than 1 million bpd of liquid demand lower than the norm.