A new system of preferential EU trade tariffs that will take into account changes in economic growth in some trading partner countries could bring a sea change in supply dynamics for Europe's jet fuel market, according to trading and refinery sources.
Planned changes to the EU's Generalized Scheme of Preferences, unveiled last October and due to start in January 2014, will take into account economic development experienced by more than half of the current 176 GSP beneficiaries.
As the terms of trade with Europe are redefined, existing relationships between Europe and oil-trading partners that flourished under the old GSP system face being redrawn.
Jet fuel is of particular interest. Two regions that will particularly lose out under the changes are the Persian Gulf and North Africa as they supply Europe with upward of 1 million mt/month.
In peak summer months, it's more likely pushing 2 million mt.
The matter has become a hot topic in recent weeks for the refining and trading community, where sentiment appears to suggest there will be no reprieve for the old regime from Brussels.
Market sources say the new system could precipitate a shift in which Europe looks to make up the shortfall in its jet fuel needs, as well as possibly impact the prices it has to pay.
"We are concerned that these changes from the EU will cut demand for jet fuel from the Middle East region," said a source with one state-run Persian Gulf oil refinery.
"This will hurt our own refining margins at a time when we are expanding our capacity, in part to meet European demand for middle distillates."
The six Gulf Cooperation Council states -- Saudi Arabia, Kuwait, Bahrain, Qatar, the United Arab Emirates and Oman -- are among eight countries that will be dropped from the GSP because they are now classified "high-income" by the World Bank.
'Upper in middle income'
Vitol, BP, Shell, Morgan Stanley and Kuwait Petroleum Corp. (via Q8 Aviation) are the five biggest jet lifters out of the Persian Gulf for export to Europe.
Total, Mercuria, Cargill, BB Energy and Spanish refiner Cepsa, not exclusively, are all also known to either have term contracts with suppliers in the region, or look to move jet fuel from the Red Sea and Persian Gulf when the arbitrage allows.
"We don't understand what the EU is doing with these changes, but it seems likely to us that the cost of jet fuel from refineries in the Middle East will go up, or else we will have to sell our jet fuel to some other markets," said one Middle Eastern refinery source.
Also on the verge of becoming ex-GSP nations are Morocco, Algeria, Tunisia, Libya and Egypt, who from west to east account for all five of North Africa's Mediterranean Sea-facing countries.
Now deemed "upper in middle income," Libya has become a key supplier of jet into the Med, having put its refining network back on track since the overthrow of Moammar Qadhafi in 2011.
Venezuela has also been categorized into the same group as Libya.
Libya's Ras Lanuf and Zawiya refineries have the capacity to collectively export over 100,000 mt/month, based on known term contract and spot tenders.
BB Energy, Vitol, Sahara Sasol, and Mercuria, among others have done business with Libya so far this year.
Another North Africa quartet has been put into a separate category: four of 34 "partners with another market access arrangement."
The EU says that means they should suffer "no negative impact" from the GSP changes.
Morocco, Algeria, Tunisia and Egypt issue near monthly sell tenders, varying anywhere between 15,000-30,000 mt apiece.
Put alongside the Libyan barrels, as well as additional output from Spain, it has contributed to making the Mediterranean nearly self-sufficient so far this year.
New Middle East, China capacity
Traders say the new system of GSPs could lead to term contracts being written and priced differently, and any change where Europe looks for resupply could alter arbitrage dynamics.
There are also several upcoming additions to the global chain supply that give cause for a bearish outlook on jet fuel prices: new capacity in the Middle East and China, and US legislation around RINs, or US renewable diesel credits.
China Aviation has announced it plans to open a trading office in Europe, expanding on a venture started in Hong Kong last year.
Traders speculate whether or not China will deploy its new refining capacity and export refined products, similar to the arbitrage opportunities exploited by South Korean suppliers.
One jet fuel trader said US refiners could be incentivized to produce more Jet-A1, the European jet fuel grade, over its domestic Jet-A and JP-54 if there was demand from Europe.
The impact of RINs has already seen refiners in the US Gulf Coast boost jet fuel supply by maximizing production of the flying fuel over diesel.
India, which will continue to be a beneficiary under the new GSP system, has also become a regular source of resupply for Europe, from Reliance's behemoth Jamnagar complex and a refinery at Mangalore, both on the country's West Coast.
As industry concerns peak, save for a last-minute extension of the old regime, it appears Europe is on the brink of ushering in a new GSP system that could have wide-ranging implications for the way it meets its jet fuel needs, as well as for other energy markets and tradable goods.