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Majors look to store jet fuel at sea as air travel is drastically curbed

LONDON/NEW YORK (Reuters) – Major oil companies including BP and Shell are preparing to store jet fuel at sea as the coronavirus outbreak disrupts airline activity globally, while refiners are shifting to diesel because of the poor margins associated with jet fuel production.

Jet fuel demand has cratered as airlines suspend flights due to the coronavirus, which has infected more than 204,000 people and killed 8,710, prompting travel restrictions from governments around the world, including the United States. Market participants and refiners have had to scramble to adjust to incredibly low prices.

Gulf Coast jet cash prices were at 26.50 cents per gallon below futures, the lowest seasonally since at least 2011, the earliest data available, Refinitiv Eikon data showed.

Robert Campbell, head of oil products at consultancy Energy Aspects, estimates that demand for jet is down more than 20 percent from normal levels of about 8 million barrels per day.

Overall, the oil market could see a record build in supply in April that could overwhelm storage capacity within months, analysts said.

BP has provisionally booked the 60,000-tonne Stena Polaris tanker to store jet fuel for 40 to 60 days starting March 20 to March 22 at a rate of $25,500 a day, according to shipping and trading sources.

A BP spokesman declined to comment.

Royal Dutch Shell has provisionally booked Torm Sara to store jet fuel for 90 to 120 days, sources said.

Vitol has inquired about chartering a VLCC, or very large crude carrier.

“With European kerosene (jet fuel) stocks near record levels, floating storage is one possibility for surplus jet fuel, though due to strict quality specifications, traders will be reluctant to attempt long-term storage of surplus fuel given the risk of contamination,” Campbell said.

Demand for jet fuel storage has also increased in the United States, said Ernie Barsamian, founder and CEO of The Tank Tiger, a terminal storage clearing house based in Princeton, New Jersey.

SHIFTING THE MIX

Storing refined products is more difficult than storing crude oil due to concerns about oxidation, stability and moisture content, said George Hoekstra, an independent consultant specializing in hydroprocessing technology.

“The industry generally expects products will be used within three months of being produced,” said Hoekstra.

Some U.S. refiners have decided to blend jet into the diesel pool to chase better margins. A small amount of jet fuel can be dropped into diesel in crude distillation towers at a refinery, which separates raw crude oil into products with different boiling points.

Refiners can also choose to adjust their fluid catalytic cracking units to yield less gasoline and more distillate.

“We are putting everything we can into diesel,” said one refining source, who wished to remain anonymous.

The move could be oversupplying the diesel market in some regions of the United States, however, traders said. Cash prices for diesel have recently also fallen despite the impending spring planting season for farmers, which typically boosts diesel demand and prices.

U.S. Gulf Coast cash prices for ultra-low sulfur diesel have fallen this week to 6 cents per gallon below the futures contract, traders said, the lowest seasonally since 2016.

Reporting by Ron Bousso and Jonathan Saul in London and Stephanie Kelly, Laura Sanicola and Devika Krishna Kumar in New York; Editing by David Goodman, Mark Potter and Sonya Hepinstall

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