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.

Civil Air Patrol shows off new home at airport

CAP officials push the squadron's airplane into the hangar at the CAP's new facility at Yuma International Airport on Friday.
Photo by Joyce Lobeck/Yuma Sun

The new CAP facility is being provided by the Yuma County Airport Authority in one-sixth of the building formerly used by FedEx on the west of the airport before it moved into its new complex.
Photo by Joyce Lobeck/Yuma Sun

“Amazing” was one cadet's response to the new home for Yuma's Civil Air Patrol squadron that was shown off during an open house Friday afternoon.

Until now, the squadron has been shunted from one temporary classroom to another, observed Cadet Jackie Taylor, a CAP member for six years.

Now the squadron has a permanent home to call its own. The new CAP facility is being provided by the Yuma County Airport Authority in one-sixth of the building formerly used by FedEx on the west of the airport before it moved into its new complex.

“Very awesome,” echoed Cadet Kelsey VanSant. She said she had belonged to CAP in Phoenix and thought that facility was awesome. But the new Yuma facility has it beat.

“We've been like orphan children,” said William “Scotty” Haskell, public affairs officer for the Yuma Squadron 508 of the Arizona Wing. “We were an aviation organization without aviation. Now we're in a corner of the airport. We can see planes come and go.”

Perhaps best of all, the new facility includes a hangar to store the CAP airplane out of the elements, which will protect it and extend its life. It also will make the airplane more comfortable to work on and be much more accessible to cadets as they learn to fly, he said.

Just inside the hangar is a training room with two flight simulators of a cockpit complete down to the noise of the engine if you turn up the sound, Haskell said.

“One cadet walked in and his face lit up when he saw the simulators,” said Craig Williams, airport director.

“The adults were happy, too,” added Haskell.

The facility also has a lunchroom and upstairs is a classroom that will be used for the first time Saturday morning for a safety briefing by Federal Aviation Administration Safety Team.

Rob Ingold, president of the Airport Authority, noted that part of the organization's mission is to promote safety and to get young people involved in aviation.

So when the idea was pitched to create space for the CAP in the vacant FedEx building, the board “embraced it 100 percent,” he said. “We hope it will encourage more people to fly at the airport.”

Haskell said the organization currently has about 28 cadets ages 12 to 18 and 23 senior members age 21 and older from all walks of life. He expects that number will increase with the new facility.

“We're really grateful the board put this together for us,” Haskell said.

Williams figures it was a great investment. He estimates the Airport Authority spent about $100,000 on the project to replace flooring, do some painting, redo the parking lot and improve the fence around the area — renovations that were needed anyway.

That also includes buying the simulators, Williams said, explaining that “our goal all along was to enhance flight training for young people.” He added that the facility will be available to local flight instructors.

In addition, Williams said, CAP is a big help to the airport and the community with its emergency operations. The organization also provides emergency radio services and it promotes aviation safety.

Haskell said that CAP was formed 71 years ago, just six days before the attack on Pearl Harbor. During World War II, CAP patrolled the U.S. coastline for German submarines.

“It has a rich history.”