Jet fuel demand to remain low for years as airlines buckle up for tough ride

Commodities & Futures
2/2 © Reuters. FILE PHOTO: A pipe transporting jet fuel offloaded from barges in seen at Kinder Morgan's Westridge Terminal on Burrard Inlet in Burnaby © Reuters. FILE PHOTO: A pipe transporting jet fuel offloaded from barges in seen at Kinder Morgan’s Westridge Terminal on Burrard Inlet in Burnaby 2/2

By Bozorgmehr Sharafedin, Tim Hepher and Koustav Samanta

LONDON/PARIS/SINGAPORE (Reuters) – Demand for flights and jet fuel could take years to recover from the coronavirus crisis as airlines struggle to survive their worst downturn, haunted by possible changes in the habits of tourists and business travellers.

Among the various fuels, jet has been hit hardest and industry leaders warn it will take years for all-important airline industry demand to return to 2019 levels.

“Jet fuel consumption will be impacted for a longer time and maybe not recover fully even next year, as travellers remain concerned about long-haul vacations, and businesses get used to online meetings,” said Per Magnus Nysveen, head of analysis at Rystad Energy, a consultancy.

Exemptions for agriculture and freight transport from widespread lockdowns have offered some support to diesel and fuel oil, but jet demand remains weak as a significant slice of the world’s 23,000-strong commercial plane fleet is in storage.

Jet fuel prices in Singapore have slumped 61% over the last two months. Refining margins or cracks for jet fuel in Singapore are currently lingering at narrow premiums over Dubai crude after hitting minus $ 3.35 per barrel earlier this month, their lowest on record.

The International Air Transport Association, representing airlines, has already warned of a slower recovery than in past crises. On Tuesday, it raised its forecast for 2020 revenue losses by 25% to $ 314 billion.

Director General Alexandre de Juniac told Reuters he sees a staggered lifting of restrictions starting with domestic, then regional and finally intercontinental routes being reopened where fuel consumption plays a critical role.

IATA has warned any recovery would not start before the last quarter of the year and could be short-lived if there is a new winter wave of coronavirus.

Graphic – World population under lockdown:

Planemakers Airbus (PA:) and Boeing (N:) have also warned of an extended crisis, with few analysts predicting a return to previous conditions until 2023 or 2024.

According to Robert Stallard of Vertical Research Partners, it could be almost five years before the active aircraft fleet returns to where it was at the end of 2019. Just as important for fuel demand, many airlines expect to use the crisis to speed up retirements of their oldest and thirstiest jets. That said, low oil prices mean the incentive to invest in costly new equipment is tempered for now.

Jet fuel demand averages about 8 million barrels per day (bpd). IEA said on Wednesday it expected demand for jet fuel and kerosene to fall by 2.1 million bpd on average in 2020, or 26%.

Rystad expected jet fuel demand to fall at least 1.9 million bpd in 2020, and JBC Energy consultancy estimated jet fuel demand over the next few months to fall to below 2 million bpd and to 5.2 million bpd on average in 2020.

“We see some normalisation only in 2021,” said JBC Energy Asia’s managing director Richard Gorry, who sees a drop of 70% in jet demand in the second quarter of 2020.

Graphic – Jet fuel demand:

Some analysts believe the shift of businesses to a virtual arena during mandatory lockdowns might not disappear entirely once the coronavirus goes away. For finance directors, the crisis could be a tempting chance to reduce office, event and travel costs until economies grow and pressure to do business face-to-face resumes. Air travel and GDP growth have traditionally been closely tied.

Homayoun Falakshahi, senior analyst at Kepler, said leisure trips could recover in the next couple of years, but business travel may take longer.

“Technology improvement is a key reason why we don’t think business travel will resume sharply any time soon,” he said.

Airport health checks, while helping to restore confidence through visible safety measures, could also discourage people from travelling by air. “Rather like what happened in the United States after 9/11, we could see the imposition of health checks, more paperwork, and basically more hassle and time getting through airports,” said Stallard.

Under lockdowns people are adapting to a more local existence and consuming less globally produced fresh food, which may have a lasting impact on fuel demand, analysts at Goldman Sachs (NYSE:) said. “Commuters and airlines account for 16 million bpd of global oil demand and may never return to their prior levels.”

But IATA’s de Juniac said economic integration would continue and that has supported consistent growth in air transport.

“Yes there will be a slowdown – there is already – but after a while people will recognise all the benefits coming from globalisation,” he said in a video interview.

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