Platts started publishing assessments for spot premiums for jet fuel in the Mediterranean Jan 2, 2002. The new assessments caused some concern in the airline industry because jet fuel buyers feared that Platts would incorporate the premiums to the base FOB med spot jet fuel assessment, which is derived through a freight netback. That is not correct. The premium assessment is separate and Platts will not add it to the base jet fuel assessment. We hope this declarative statement eases any remaining concerns.
Platts started publishing a new assessment for jet fuel in the Mediterranean in November 2001 using an improved freight methodology. The new assessment is published under the Platts descriptor Jet Av fuel FOB Med and will fully replace Platts Jet FOB Med early in 2003. The airline industry was concerned that the new assessment would lead to a higher base assessment for jet fuel in the Med. This is correct under most freight scenarios. While Platts understands the airline industry concern, Platts responsibility is to publish accurate assessments and this is acknowledged by our subscribers.
However, we recognize that the higher base assessment may lead to some contractual
discomfort among parties. Our objective is to describe what the impact of the
new methodology has been on the jet fuel assessments.
Over the past three months, the average spread between the jet assessments generated
under the two methodologies has been slightly under $5.50/mt. Because most contractual
negotiations involve a premium component added to the Platts base assessment,
under the new methodology such a premium would logically be expected to decrease
for the impact of the higher base price to be neutral.
Platts wishes to emphasize that it does not take part in commercial negotiations,
and that it neither encourages nor discourages the use of its assessments in contracts.
The following notes contain background on the proposed changes, and some Frequently
Asked Questions with Platts answers.
The chart below tracks the differential between Jet FOB Med and Jet Av Fuel FOB
Med since November 2001.
Platts has already issued a series of discussion papers and subscriber notes
regarding the changes it plans to make in the formula used to calculate the
transportation cost of moving jet fuel from the Mediterranean to NorthWest Europe.
This freight assessment has since 1998 been used in the calculation of the FOB
Med jet fuel assessment.
Platts in 1998 announced that it would assess the jet fuel market FOB Med based
on a freight differential to its CIF NWE assessment, using its published tanker
freight rates. The formula used to calculate this freight was changed at the
start of the year 2000. Because freight patterns and vessel qualities have changed
substantially since then, Platts at the end of the year 2000 began a process
of consultation with the industry and airlines to seek ways to improve its freight
calculation, with the aim of more accurately reflecting the FOB value of jet
fuel in the Mediterranean.
Platts in October 2001 announced the changes it would make and the phase-in
period for these. The subscriber notes inviting feedback and announcing the
changes are appended below but essentially the changes are as follows:
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Platts in November 2001 introduced a new assessment under the name Jet
Av Fuel under the main Mediterranean products assessments table in Platts
European Marketscan and related ublications, reflecting the value of jet fuel
FOB Med based on the new freight calculation.
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It agreed to publish the existing FOB Med assessment without any change
in its basis until the end of 2002, and then to replace it with the Jet Av
fuel assessment on the first working day of 2003.
-
From Jan 2, 2002 it began a new daily assessment of the spot premium paid
to the Platts FOB Med jet assessment.
As part of the process of explaining these changes to companies which use Platts
information, Platts put out a series of Subscriber Notes and briefing papers
during the consultation period, which were carried on Platts Internet site:
www.platts.com
Airlines have asked for clarification of several aspects of these changes,
and in particular, the significance of point 3) regarding spot premiums.
Platts attended a meeting in Hounslow on Jan 28 hosted by the International
Air Transport Association (IATA) and also attended by some members of IACA at
which it clarified issues regarding the changes in assessment methodology, and
also explained the purpose of the premium assessment. The meeting in January
followed an earlier discussed hosted by IATA on Oct 9 in Rome, at which Platts
sought to explain the reasons and impact of the proposed changes to attending
airlines.
The Powerpoint presentation given at the Jan 28 meeting is available through
the hyperlink below:
This paper attempts to repeat that explanation, and to give clear answers
to some of the questions we have been asked.
Will the spot premiums be included in the new assessment?
Why have we decided to quote spot premiums?
Should the spot premium be included in Platts-related contracts?
What is the basis of the new assessment? Jet FOB Med or Jet Av
Fuel FOB Med?
When will the 60-day notice period begin?
Will the spot premiums be included in
the new assessment?
The short answer is, No. Some airlines appear to have mistakenly come to the
belief that the spot premiums assessed by Platts will be included in its Jet
Av Fuel FOB Med price that will eventually replace Jet FOB Med. This is incorrect.
In fact, the Platts subscriber notes issued clearly state that the premiums
will not be included in the new Jet Av Fuel FOB Med assessment.
The following is the text of the Subscriber Note published in Platts European
Marketscan (with italics added):
SUBSCRIBER NOTE: In line with Jet Fuel Subscriber Notes published in
October and November 2001, Platts will effective Jan 2, 2002 to Dec 31, 2002
publish an assessment to reflect the premium paid on a spot basis to FOB Med
jet. The premium assessed will be for jet fuel cargoes meeting normal aviation
fuel requirements, on MR size vessels, basis FOB Italy. Jet fuel from a wide
geographic area bounded approximately by North Africa, Greece and Spain may
form the basis of the assessment, with freight differentials applied to ensure
consistency. Higher quality, low sulfur jet grades, for instance those meeting
DPK standards, will not be directly included in the assessment but may be used
indicatively.
Platts wishes to clarify that the FOB Med jet premium is a
separate assessment, and the premium will not be included in the formula used
to calculate Jet Aviation Fuel.
The current proposal is that from Jan 2,
2003, the Platts premium assessment will reflect the premium paid to the Jet
Aviation Fuel assessment. Market conditions may require that the basis for this
assessment be moved to Jet Aviation Fuel prior to Jan 2, 2003. Such a move would
be required, for instance, if business were to move entirely from FOB Med jet
to Jet Avation Fuel. In the event that Platts were to make such a switch, 60
days notice will be given. Comments should be made by email to Jorge Montepeque,
jorge_montepeque@platts.com
or John Kingston, john_kingston@platts.com.
Platts quotes the spot premiums being paid to underlying benchmark assessments
in many of the markets it covers, to add transparency and visibility to the
market. Information is the core of our business, and information about spot
premiiums is valuable to market participants. Because Med jet prices are, through
the freight formulae, largely tied to CIF NWE jet fuel asssessments, these premiums
can be volatile and it is essential for market participants to track these.
Among other areas in which Platts tracks spot premiums, we assess both an outright
value and the spot premium for all FOB Arabian Gulf oil products and in many
of the Asian crude oils reported by us. Platts European Marketscan also carries
information about spot premiums, including an assessment of that on E-4 straight
run fuel oil.
That is entirely up to principals and their counterparties to decide. Platts
has long stated as a matter of policy that it neither encourages nor discourages
the use of its information including its assessments in contracts. Platts takes
no part in commercial negotiations of any sort; it is there to reflect the market,
not advise people how to do business.
Platts will assess spot premiums in relation to the old jet formula so long
as there is reasonable liquidity in this market. We recognise that liquidity
patterns may change, however, and that Platts needs to respond --albeit with
due notice-- if this happens. Platts advised that the notice period would be
at least 60 days, because it wants to give parties adequate notice if changes
in trading patterns require that the switch be made before the end of 2002.
Platts intends to assess the spot market premiums paid to the FOB Med jet fuel
assessment based on the old formula until these become illiquid.
Platts decided to introduce the revised FOB Med assessment based on the "new"
formula with a lengthy notice period, to avoid as far as possible any disruption
to the market; indeed, it will only be early in the year 2003 that the calculation
under the old methodology is finally discontinued. What remains uncertain is,
when market participants will wish to switch quotes-related contracts from the
assessment based on the old to that based on the new formula.
Assessment of prevailing spot premiums are likely to be most accurate when based
on a liquid market. If all contracts were to be moved to the new assessment
at an early date, any spot premiums discussed in the market would be in relation
to the "new'"assessment; whereas if contracts remain tied to the "old" assessment
until the end of 2002, spot premiums discussed would likely be in relation to
the "old" formula.
Platts can not dictate the pattern of liquidity although, in practice, it is
likely that the change from "old" to "new" will be made by companies gradually
during 2002.