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Military demand adds to tight jet fuel market

LONDON Increased military demand for aviation fuel in the Middle East has forced Kuwait to ask its regular customers to delay February tanker loadings, a move likely to exacerbate a growing tightness in the jet fuel market.

Traders say aviation fuel markets have been tight in recent weeks, leading to price spikes, because demand from troops preparing for war in the Middle East could be sucking up supplies from the region and limiting exports.

'We have been asked to delay February liftings from Kuwait because of good military demand in the Gulf,' one trader said, adding that the initial delay to term customers was likely to be a week.

Kuwait exports some 335,000 tonnes of jet fuel a month, mostly via long term contracts, but Gulf sources say its obligation to provide US forces with free fuel for operations inside the country could leave it with less volume for export.

The United States and Britain have already stationed tens of thousands of troops in the region, mostly in Kuwait, and are widely expected to launch an attack on Iraq before the summer.

In Asia, traders said Saudi Aramco had delayed loading a term jet fuel cargo by about a week, fuelling suspicions of a cutback in supplies from that country, though some players attributed it to increased demand due to the Haj pilgrimage.

The premium of jet kerosene over gas oil in Asia rose on Tuesday to about $2.40 a barrel from last week's $1.60.

'The region is seeing less supply from the Middle East. The market is nervous about war that could lead to supply disruptions,' an Asian trader said.

But European traders said they had not yet seen delays to Saudi jet fuel loadings. The country exports over 350,000 tonnes a month.

The military demand and looming war is only adding to the bullishness of an already sizzling market. Jet prices stand now at highs last seen over two years ago and traders said they will likely rise further as a US-led war against Iraq approaches.

While Tuesday saw prices dip from last week's highs, traders see it as a matter of time before they start rising again.

'There was a bit of panic last week after the United States reported a fall in (oil product) stocks and it's just correcting from that,' said a trader at a major.

A strike in Venezuela, a key jet supplier to both the United States and Europe and a heavy U.S. refinery maintanance schedule is drawing jet barrels transatlantic from Europe.

'About 300,000 tonnes have sailed transatlantic,' a trader with a major said adding that several North African shipments have also been diverted from Mediterranean destinations to the United States.

Another trader said European refiners had maximised jet output amid booming margins but the fuel was being immediately sucked up.

'Right now it is the risk of getting caught short because of war rather than actually being short,' he said.

Jet fuel spot prices stand at over $350 a tonne as compared to about $280 at the start of the year while front month swaps have risen some $60 in the past four weeks.

This is radically different from this time last year when a poor aviation outlook post-September 11 kept jet prices grounded.

Traders said however that a further upside was in the offing even if Venezuelan production normalises as expected.

'We are going to see higher values,' a trader said. 'The question is how high will it go.'