Trade Idea: Buy Q2 ’24 NWE Jet Diff

Onyx Research Analyst Mita Chaturvedi’s trade idea this week is to buy the Q2’24 NWE Jet diff.

The jet diff – which is the Northwestern European Jet minus ICE low sulphur gasoil – sank from nearly $60/mt on Mar 13 to a low just shy of $50/mt on Mar 18. Considering the rangebound nature seen recently in this contract, we believe the diff may have found a psychological support point at these levels.

Fundamentally speaking, European jet demand has been too depressed lately to stand against the oversupply of jet inventories in the ARA region.
However, market participants believe that aviation demand may be on the rise in line with the upcoming summer travel season. In the beginning of February, Europe’s three biggest low-cost carriers reported optimism surrounding summertime air travel.

While open interest remains muted in April – possibly over risk-off sentiment due to the recent jet weakness – we see more interest in the remainder of Q2’24, with open interest in May and June sitting over the five-year averages. While the remainder of the April tenor jet structure remains in backwardation, we see a small contango – which could further induce support for the prompt diff, thus lifting up the Q2’24 tenor.

This is a contrarian trade idea, considering the weakness in European jet. However, with turnaround season starting in Asia, the arb closed from the East and freight levels remaining high, we see possible complications in bringing supply from the East, allowing further bullishness for the Euro jet. We see this supported by technical indicators with the April jet diff’s RSI recently climbing out of oversold territory and still looking upwards- signalling that further bullish momentum may be underway.

If jet supply remains higher than demand in Europe, or if ICE gasoil prices rally further, the jet diff will continue to find pressure. However, considering the more positive sentiment brewing fundamentally in Euro jet and seeing that warmer weather typically brings bearish tides for gasoil, we see good risk/reward in this trade.