Southwest Airlines today reported its third-quarter results, which revealed a new record in operating revenues and net income.
Southwest’s third-quarter 2018 total operating revenues soared by 5.1% year-over-year, to a third-quarter record of $5.6 billion. Southwest’s third-quarter net income also hit a record $615 million, or $1.08 per diluted share.
Third-quarter operating expenses increased by 7.2%, to $4.8 billion. The company reported quarterly economic fuel costs were $2.25/gal, including 6cts/gal in premium expense and 10cts/gal in favorable cash settlements from fuel derivative contracts. That compares to $2.07/gal in the third-quarter of 2017, which included 6cts/gal in premium expense and 31cts/gal in unfavorable cash settlements from fuel derivative contracts.
The company reported quarterly 2018 fuel efficiency improved by 1.1% year-over-year, driven primarily by the retirement of the classic fleet and the addition of more fuel-efficient aircraft.
Based on Southwest’s existing fuel derivative contracts and market prices as of Oct. 19, fourth-quarter 2018 economic fuel costs are estimated to be $2.30-2.35/gal, including 7cts/gal in premium expense and an estimated 14cts/gal in favorable cash settlements from fuel derivative contracts.
As of Oct. 19, the fair market value of the company’s fuel derivative contracts settling in the fourth-quarter of 2018 was an asset of about $82 million, and the fair market value of the hedge portfolio settling in 2019 and beyond was an asset of around $521 million.
Annual 2019 economic fuel costs are estimated to be $2.35-2.40/gal, including 4cts/gal in premium expense and an estimated 8cts/gal in favorable cash settlements.
“On the cost side, our third quarter 2018 unit cost performance was in line with our expectations. Our fuel hedge portfolio mitigated a significant portion of market jet fuel price increases, and we are pleased with the fuel hedge in place for both fourth quarter 2018 and annual 2019,” Southwest’s Chairman of the Board and CEO Gary C. Kelly said in a statement. “Based on current trends, we continue to expect modest year-over-year inflation in our annual 2018 unit costs, excluding fuel and oil expense and profitsharing expense.”
–Andrew Atwal, aatwal@opisnet.com
Shell’s Deer Park Refinery Resumes Operations: Official
Shell’s 340,000-b/d Deer Park refinery in Texas is back up and running after it was forced to shut down following Hurricane Harvey, a company official said.
“Shell Deer Park is now up and running following impacts of Hurricane Harvey,”
Shell spokesperson Ray Fisher told OPIS in an emailed statement. “We would like to thank all of our employees, contractors and local agencies who worked around the clock to get the site up and running as quickly as possible. The top priority of Shell Deer Park is to operate in a safe and environmentally sound manner.”
OPIS previously reported on Sept. 8 that the refinery was in the process of restarting. There were also separate reports that a fire broke out at the Shell Deer Park plant earlier this week.
–Andrew Atwal, aatwal@opisnet.com
Motiva Port Arthur Slated to Be at 40% Capacity by End of Weekend: Official
Motiva is expecting its 635,000-b/d Port Arthur refinery in Texas to be initially operating at 40% of total capacity by the end of the week, a company official told OPIS.
“Motiva’s Port Arthur refinery is in the final phases of equipment assessments and initial phases of refinery start up. We expect the refinery to initially return to approximately 40% production by the end of the weekend, provided that the final assessments meet our operational standards,” Motiva spokesperson Angela Goodwin told OPIS in an emailed statement. “We continue to work closely with state, local and federal governmental officials, as well as disaster relief organizations to address storm impacts on our business and to aid our communities in their recovery.”
Sources previously told OPIS that Motiva’s Port Arthur plant was expected to be down for about two weeks. The refinery was shut on Wednesday, Aug. 30, following Hurricane Harvey’s landfall in the Texas Gulf Coast region.
–Andrew Atwal, aatwal@opisnet.com
As 2019 begins, IMO 2020 regulations continue to loom over the Gulf Coast distillate market, with many market participants wondering how prices and basis levels will be impacted when the law goes into effect Jan. 1, 2020.
In its December Short Term Energy Outlook, the U.S. Energy Information Administration (EIA) warned about the “uncertainty and complexity” surrounding the IMO 2020 regulations. 2020 will ring in the implementation of a mandate to reduce sulfur emissions in marine fuel.
EIA examined the various options ship operators have for complying with the regulation, which include switching to the new compliant fuel. However, the agency said that the cost, availability and specifications of a new fuel for use in marine engines remains uncertain.
Another option is to install scrubbers on vessels to remove sulfur from the ships’ exhaust. Even if scrubbers become widely used, the price and availability of high-sulfur fuels after 2020 remains uncertain, the report stated. Clarksons Platou, a ship brokering company, said scrubbers have been adopted by an average of 7.5% of vessels across three major shipping sectors.
The EIA noted the new regulations pose a “significant challenge” for global petroleum refineries, as removing sulfur from marine bunker fuel can be an expensive and capital-intensive process.
“If scrubbers become widely adopted, higher-sulfur residual oils might still be used, potentially reducing the value of existing and new refining units capable of upgrading the residual oils,” the EIA report said.
Barclays Capital has, however, downplayed the possibility of non-compliance with IMO 2020 due to ship insurance concerns. The bank noted that few to no ship owners would be willing to risk losing ship insurance coverage by violating the mandate.
With the IMO 2020 mandate looming, many Gulf Coast distillate market players are grappling with how the regulations will impact spot trading.
“Ultra-low, middle distillates in the USGC will see an increased demand as we move closer to 2020,” a source said. “IMO regs require much less sulfur, and USGC refined jet is mostly ULSK [ultra-low-sulfur kerosene], because the majority of USGC refiners hydrotreat their jet.”
The source added that Gulf Coast ULSK streams should be sought after going forward for fuel blending to meet IMO specs.
“Look for more imports of typical 54-grade while the “near zero sulfur” USGC refined jet fuel gets soaked up for blending and exports until more ultra-low distillate refining capacity comes on stream by [the] end of 2020,” the source added
Another Gulf Coast trade source believes the IMO 2020 regulations may already be priced into the market.
“In general, forward cash markets are within $.0010 of the swaps quotes. To the extent the variables are ‘normal’ I do not expect the basis for ULSD to vary more than $.0200 either side of the current forward swaps,” the source said.
“What the swaps do indicate is that fourth quarter 2019 probably has some impact of IMO 2020 built in. Otherwise, I would expect fourth quarter to be close to -.0750. I would also expect by the end of first-quarter 2020, the market will realize that the impact of IMO 2020 is not as great as perceived in late 2019.”
There is also considerable attention focused on distillate demand as the calendar rolls to 2019.
“We expect colder YoY Northern Hemisphere winter, which should add 300,000 to
400,000 b/d of middle distillate demand; supportive for refining margins and throughput,” Macquarie Capital said in a report.
“We still expect distillate demand to outpace supply during the period, off an already tight Q4 2018 base,” said Energy Aspects. “(But) the biggest challenge from IMO 2020 is the need to wipe out huge amounts of surplus HSFO output. IMO can’t just be about raising clean product cracks, because this will enable simple refineries to stay in business. Most of the work needs to happen at the dirty end of the barrel in order to drive simple refineries with high HSFO yields out of business.”
JBC Energy noted in a recent report that weaker gasoline cracks compared to diesel could indicate supply tightness for the coming winter.
After Gulf Coast ULSD spot prices started 2018 around $1.95/gal, cash values are set to finish the year around some of their lowest amounts since 2017.
Notably, ULSD prices have fallen by more than 14% since the start of the year, while basis levels have been fairly steady, sticking close to the trends seen over the past several years.
As the calendar gets deeper into 2019, what remains to be seen is how prices and basis levels will be impacted by the upcoming IMO regulations.
–Andrew Atwal, aatwal@opisnet.com
2019 Preview: Jet Fuel Demand Holds Strong; IMO 2020 in Focus
As the calendar turns to 2019, jet fuel market watchers are now turning their attention to IMO 2020, and the possible impacts it could have on prices and trading.
There has also been a considerable amount of attention lately on jet fuel consumption by U.S. airlines, which has remained strong. The annual pace of the growth in jet fuel has also outdistanced its major transportation fuel components — gasoline and diesel fuel.
Recent statistics by the U.S. Energy Information Administration (EIA) show U.S. jet fuel demand growth of about 2.3%, a figure that has remained consistently above 2% all year, with fuel consumption averaging about 1.75 million b/d.
On a global scale, jet fuel demand growth has doubled the pace of U.S. consumption, averaging closer to 4% annual the past several years.
For comparison, U.S. motor gasoline consumption in the U.S. has averaged less than 1% in 2018, running about 9.35 million b/d. Diesel fuel, meantime, consumption has been slightly stronger than gasoline, but at 4.1 million b/d, it still trails jet fuel by more than half.
Looking forward to 2019, U.S. jet fuel consumption is slated to continue to outpace gasoline. However, its rate of consumption growth may be rivaled by diesel as global oil markets transition to IMO 2020. The mandate requires ships to use low-sulfur fuel. Some vessels will install scrubbers to ensure clean fuel, while others will burn low-sulfur fuel oil or use diesel.
Most experts have agreed that IMO 2020 — set to take place Jan. 1, 2020 — will increase global diesel fuel demand requirements.
A source told OPIS that Gulf Coast ultra-low-sulfur diesel and middle distillates — including jet fuel — will see increased demand moving toward 2020.
“I think we’ll see USGC 54-grade move to a 2-3ct premium over 62-grade between now and fall of 2019,” the source said. “Also, the NYMEX differential on these products both should trade at least another 5cts higher than present by May and move towards NYMEX ‘flat’ by end of 2019.”
Looking back to December 2017, U.S. jet fuel demand set a record in terms of weekly deliveries of fuel to the market, according to the EIA. During that month, jet fuel demand hit 2.108 million b/d, which marked the first time ever that weekly jet fuel usage topped 2 million b/d.
For context, only once in 2018 did U.S. jet fuel consumption top 2 million b/d, and that took place in August 2018, when it reached 2.006 million b/d.
Nevertheless, jet fuel consumption in 2018 topped 1.9 million b/d for more weeks than any other time in U.S. history, according to the EIA. On five occasions, U.S. jet fuel consumption came in above the 1.9 million-b/d mark.
Also, the number of times it perched above 1.8 million b/d in 2018 was also the most ever.
OPIS projects that U.S. jet fuel demand will continue to grow in 2019 and can only be stopped by a global economic slowdown. Growth in passenger traffic in the U.S. and abroad, along with higher demand for freight deliveries, will continue to drive that growth.
IHS Markit, the parent company of OPIS, on several occasions in 2018 issued special reports on jet fuel, each time expressing confidence that demand will continue to be robust over the coming years.
By 2040, IHS Markit projects that global jet fuel demand will climb from 8% of total refined product demand in 2017, to more than 10% by 2040. The global market is expected to reach 9.5 million b/d by 2040, up from 7.45 million b/d in 2018, IHS Markit experts predict.
Most of that growth will be driven outside of the U.S., although America remains the biggest consumer of fuel, so it will remain a critical contributor to that expansion.
U.S. refiners have also continued to make a concentrated effort to ramp up jet fuel production.
While total jet fuel production in 2018 never topped the vaunted 2 million-b/d mark to match demand, it did top 1.9 million b/d on a regular basis during summer, averaging 1.96 million b/d in August 2018, a monthly record.
Moving forward, it is reasonable to believe U.S. jet fuel production will remain robust in 2019, as refiners keep pace with demand growth and an export market that has more than doubled for U.S. refiners over the last several years.
U.S. jet fuel exports consistently average more than 200,000 b/d, and easily double the export rates of any prior year.
Notably, twice in 2018 U.S. jet fuel exports topped 300,000 b/d, setting a record of 359,000 b/d in March 2018, only to be surpassed by the 377,000 b/d export rate set in October 2018, EIA data show.
Comparing U.S. exports of jet fuel with imports, it becomes evident that the U.S. has become a net exporter of fuel, with much of the material going to South America.
Refinery expansions and high utilization rates, driven by normal demand growth and IMO 2020 requirements, should mean sufficient production of jet fuel in the U.S. and worldwide to satisfy demand requirements.
However, infrastructure issues, including sufficient disruption capacity in terms of pipelines and storage, remain some of the biggest concerns for airlines as they compete with other transportation sectors for supply space.
Views on oil pricing for 2019 have already begun to take shape. The general view is that higher crude oil production from the U.S. and other areas will help to offset OPEC and Russia’s late 2018 decision to reduce output to help control a building surplus.
U.S. jet fuel prices will likely outperform crude oil, with strong crack spreads evident most of the year. However, if crude prices remain subdued as many project, U.S. jet fuel prices are not expected to top their highest rates of 2018, which peaked in October when the OPIS U.S. spot average hit $2.40/gal.
Given where U.S. jet fuel prices are finishing 2018 — near their cheapest levels all year — it would take a 30% spike in prices in 2019 to match the 2018 highs, which is not impossible, but not predicted.
Moving toward 2019, demand is expected to remain robust, with market watchers continuing to focus on IMO 2020 and the implications it may have on pricing and trade.
By Andrew Atwal 