Thursday, March 01, 2012

The Oil Market Has an Aviation Problem: Passenger-flight activity is mired at around half of pre-pandemic levels, leaving a hole in global oil demand

The downturn buffeting the global aviation industry has slashed demand for jet fuel, posing yet another obstacle to the oil market’s recovery.

Cars and trucks quickly returned to the road when officials lifted restrictions on movement this spring, sparking a revival in gasoline and diesel consumption. Planes have been slower to take back to the sky, hobbling sales of kerosene, or jet fuel.

Demand for passenger flights this year is likely to decline by more than half compared with 2019, the Organization of the Petroleum Exporting Countries said Thursday. Fuel consumption in the aviation sector won’t surpass pre-coronavirus levels until closer to 2025, the group said in its annual report on oil’s long-term future.

In the U.S., carriers began cutting tens of thousands of workers last week after months of intense lobbying for a second round of government funds to continue paying workers failed to deliver results.

President Trump this week called on Congress to approve assistance for U.S. airlines to avert the widespread layoffs. The beleaguered industry is at the center of negotiations between senior administration officials and House leaders over delivering a new batch of relief for the U.S. economy before the election. A second round of government funds may help pay workers, but is unlikely to get travelers back in the air.

The muted recovery in air travel has rippled through the energy market and exacerbated the pressure on crude-oil prices. West Texas Intermediate futures have slumped 33% in 2020, even after receiving a boost from production cuts due to Hurricane Delta in recent sessions.

The market for jet fuel is “pretty sick and will probably stay sick,” said Doug King, chief executive of U.K.-based hedge fund RCMA Capital LLP. This is one reason why the oil market has “a massive, long, drawn-out demand problem” and why crude prices will stay on “the same old road to perdition over the next few months,” Mr. King added.

Demand for jet fuel is considerably smaller than gasoline or diesel consumption. Still, it represents a sizable chunk of the oil market and one that was growing quickly before the pandemic.

The world burned 8.1 million barrels of jet fuel a day in December last year, the final full month before coronavirus disrupted travel and trade, said Natasha Kaneva, senior commodities strategist at J.P. Morgan.

Come this December, global jet-fuel consumption will stand at 5.4 million barrels a day, down by a third, Ms. Kaneva forecasts. In contrast, she expects gasoline demand to rebound to 24.6 million barrels a day, just 6% lower than a year before.

Jet fuel’s slow comeback led the U.S. Energy Department this week to cut its forecast for global oil demand in the remainder of 2020 and next year.

There are bright spots: Cargo flights have bounced back and domestic air travel has picked up, especially within China. But international travel remains depressed and may never grow at pre-pandemic rates again as companies swap business trips for virtual meetings, said Regina Mayor, KPMG’s global and U.S. head of energy and natural resources.

Weak demand for kerosene has shifted the calculus for refiners when they decide which fuels to produce. A year ago, a barrel of European jet fuel cost about $20 more than a barrel of Brent crude, according to S&P Global Platts. That gap—a proxy for what refiners earn by buying crude and selling kerosene—has shrunk more than 90% to $1.50 a barrel.

Weak kerosene demand has encouraged refiners, which process crude oil into usable fuels, to dial back the amount of jet fuel they make and pump out a glut of diesel instead. In turn, this has depressed diesel prices and added to strains on profitability at refining companies.

Struggling to earn money, refiners are running well below capacity, pinching demand for crude. This will continue to act as a drag on the oil market in the coming months, analysts say.

“It’s a big challenge,” Eugene Lindell, senior analyst at consulting firm JBC Energy, said of the contraction in air travel. Mr. Lindell forecasts that demand for jet fuel will continue to grow deep into the 2030s, but sees overall oil consumption peaking in five years. Some of the refineries he advises, however, are worried that demand has already peaked.

“It’s one of the big questions out there,” Mr. Lindell said of demand for jet fuel.

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