Oil prices have rallied since the start of this year, pushed up by the OPEC+ cuts tightening the market and the vaccine rollouts.
Analysts and industry leaders have already called the ‘balancing of demand and supply,’ but one corner of the market is still struggling to catch up and will likely struggle for another two years—jet fuel demand.
Pre-pandemic, aviation fuel accounted for around 8 percent of global oil demand—not a very large share in itself, but the collapse in air travel has severely cut into jet fuel demand, much more than the demand loss for road transportation fuels.
The crash in jet fuel demand will be the hardest to recoup, analysts say, because international—and especially intercontinental—travel is still in the doldrums and unlikely to reach pre-COVID levels until 2023. Many countries still have lots of travel restrictions and travel bans, which will likely stay in place until vaccination rates rise so much as to allow international airline travel quarantine-free.
Some countries—and the airline industry, of course—hope that advancing vaccinations would allow more people to plan vacation travels by airplane in the summer of 2021.
While domestic travel in some of the biggest air travel markets such as the United States and China have helped save some of the aviation fuel demand, long-haul intercontinental travel naturally accounts for a higher share of jet fuel consumption.
The still weak outlook on jet fuel demand could be a major drag on the upward potential of oil prices, even if the current bullish momentum has had Goldman Sachs predict Brent hitting $75 a barrel in the summer of 2021.
Airline Travel Still Struggling
The number of global commercial flights in January 2021 dropped by 9.1 percent compared to December 2020, as many countries introduced new travel restrictions with emerging new variants of the coronavirus, data from Flightradar24 showed. The decline in January air travel was the first drop since October 2020, while the number of commercial flights was down by 41.6 percent compared to January 2020.
In the week of February 22, global seat capacity is now down by 44 percent compared to the same week last year—airlines are offering 53 million seats this week compared to 95 million for the same week last year, according to data from air travel intelligence company OAG.
While demand for air travel has edged up from the worst pandemic hit in April and May 2020, global passenger traffic and seat capacity is still much lower than pre-COVID levels, unlike gasoline demand which has recovered in major markets such as China and India and is not too far from ‘normal’ in the United States.
Jet Fuel Demand To Take The Longest To Recover
Until mass vaccinations—or vaccine passports or digital health travel passes, or whatever the industry and countries will call it—allow quarantine-free travel on international flights, demand for aviation fuel will not return to the 2019 levels. Last year, air travel demand was down by 65.9 percent compared to 2019, and the airline industry incurred total losses of US$118 billion, the International Air Transport Association (IATA) says.
Compared to jet fuel demand of 7.9 million barrels per day (bpd) in 2019, aviation fuel consumption will continue to lag by more than 2 million bpd during the first and second quarter this year, and will likely remain between 5.4 million bpd and 5.7 million bpd, Energy Aspects has estimated, as carried by Reuters.
Continued low demand for jet fuel will account for 80 percent of the 3.1-million-bpd gap in oil demand this year compared to pre-pandemic levels, the International Energy Agency (IEA) has said. The IEA expects global oil demand to rebound in 2021 compared to 2020 levels. Yet, this is a smaller rebound than earlier expectations because of continued weakness in the aviation sector.
In its latest Monthly Oil Market Report (MOMR) in February, OPEC expects oil demand recovery to continue to be riddled by many uncertainties across many sectors, “particularly transportation and most notably aviation.”
Vaccines Could Give Jet Fuel Demand A Shot In The Arm
“The rebound will depend on the impact of COVID-19 containment measures and how fast herd immunity targets are reached. Anticipated gains in oil consumption in 2021 will not be at a level to match pre-COVID-19 demand, mainly due to the lagging aviation sector and the structural impact on consumer behaviour post-COVID-19,” OPEC said about its oil demand outlook for North America.
In the United States, “we are unlikely to see a return to 2019 passenger volumes before 2023-2024,” Airlines for America, the industry trade organization for the leading U.S. airlines, said in its latest Impact of COVID-19 update last week.
“Air-travel demand remains severely depressed but could pick up meaningfully as vaccination rates increase and travel restrictions are loosened,” Airlines for America said.
Jet fuel is the odd man out when it comes to the largely ‘back to normal’ U.S. petroleum inventories and demand, Reuters market analyst John Kemp wrote in a post last week.
Airline travel, especially on international flights, will depend on major economies accelerating vaccination rates to allow some kind of normal summer 2021 vacations abroad, as well as pent-up demand from consumers who are already fed up with lockdowns and travel restrictions.
Until aviation fuel demand approaches pre-crisis levels, jet fuel will be a drag on oil price gains, especially as the OPEC+ group still has 7 million bpd of collective oil production cuts to return to the market until April 2022.
By Tsvetana Paraskova for Oilprice.com
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