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[SINGAPORE] Asia's jet fuel refining profits, which are down a quarter from their 2015 peak earlier this year, are expected to weaken further as flight bookings drop due to an outbreak of a deadly respiratory disease in South Korea.
Weak demand from Europe and high inventory had already been weighing on aviation fuel margins, countering an expected rise in passenger demand after lower jet fuel prices drove many airlines to remove fuel surcharges. "It's still too soon for Mers to have an impact but whenever there is an outbreak, jet fuel (prices) are usually affected," a Singapore-based trader said, referring to the Middle East Respiratory Syndrome.
Worry about the outbreak has spread from South Korea across the region, with dozens of suspected cases being tested in Hong Kong, though none confirmed, and many thousands of trips to South Korea cancelled.
Taiwan's two biggest airlines are temporarily cutting flights to South Korea by nearly half, and Hong Kong's Cathay Pacific Airways Ltd said it had seen a drop in bookings to South Korea.
While the World Health Organisation (WHO) has not recommended any curbs on travel or trade, some airline stocks have taken a hit. Shares of South Korea's Asiana Airlines , for instance, are down more than 10 per cent since the start of the month, adding to losses that cam over the previous two months as crude oil and jet fuel prices rebounded.
With regional inventory set to build, traders expect jet fuel to go into storage or be blended into gasoil, whose demand as a power generation fuel is buoyed during summer.
The jet fuel cash differential on June 8 fell to its lowest since December 2011, Reuters data showed, indicating that demand for the fuel is failing to keep pace with supply. The arbitrage to ship the fuel from Asia to Europe is shut due to a lack of demand from Europe as the weak euro takes its toll, traders said. Higher freight rates are also keeping cargoes in Asia, one of them said.
With European refiners capitalising on healthy profit margins due to firm gasoline demand, inventory of jet fuel there is also building, they said.
China has also stepped up its jet fuel exports with Sinopec shipping its first cargo from the country to Gibraltar.
Still, a 10 per cent rise in Indonesia's jet fuel demand during the Muslim fasting month of Ramadan, when many urban dwellers will fly home to see family, could stem some losses in margins over the June-July period, traders said.