Jet Demand Fears Emerge as Airports Limit Passengers

Oil markets fear the aggressive interest rate hikes now being deployed to curb inflation will damage economic growth and trigger widespread demand destruction. Supply worries took a back seat as international crude benchmark Brent fell below $100 per barrel for the first time since April, giving up $40/bbl from its late March peak. ICE Brent futures ended the week down $5.55/bbl at $99.10/bbl Thursday, while Nymex West Texas Intermediate lost an even heftier $6.95/bbl to finish at $95.78/bbl.

Demand is already showing signs of fracturing. The International Energy Agency (IEA) shaved 200,000 barrels per day from its 2022 demand forecast in its latest monthly Oil Market Report published Wednesday. The energy watchdog now sees demand growing 1.7 million b/d this year, mainly in non-OECD countries as China comes out of lockdown. High pump prices are still taking a toll on buying in the OECD with a sluggish start to the US summer driving season and softer diesel demand in Europe. “Rarely has the outlook for oil markets been more uncertain,” the agency wrote in its Jul. 13 report.

Jet is still playing catch-up having missed out on last year’s Covid-19 recovery, but could soon reach its limit. The IEA still expects global jet demand to jump 24% this year versus last despite airport staffing shortages causing flight cancellations in both Europe and the US.

Traders fear Europe’s post-pandemic recovery has already gone into reverse as understaffed airports impose limits on the number of passengers they can handle. Heathrow’s 100,000 passenger per day cap means airlines are having to cut back recently restored services rather than just adding fewer flights than planned. One leading into-wing supplier suggests jet fuel uplift at Heathrow will fall 3%-4% this month compared to last despite the start of the summer holiday season. It’s not just Heathrow. Amsterdam’s Schiphol airport last week capped passenger numbers at 67,500 in July and 73,000 in August, prompting Dutch flag carrier KLM to announce it was cutting between 10 and 20 flights a day until Aug. 28. 

Cargoes were pegged at a $72.50 per metric ton premium to roller-coaster ICE low-sulfur gasoil futures at Thursday’s close. Differentials are up on the week, but against a much lower August screen. Higher imports are meanwhile driving spot liquidity. The week saw four cargo deals in S&P Platts’ end-of-day pricing window. Swiss trader Vitol sold Platts-related to both BP and Shell into Le Havre on Jul. 7 and Jul. 12 including volume on board the Navig8 Passion bringing jet from Kuwait. China’s Unipec sold twice to BP on Jul. 12 and Jul. 14 into Rotterdam and the UK’s Isle of Grain. Supply-chain issues are taking a back seat even though falling Rhine water levels remain a potential threat. The river level at Kaub near Frankfurt fell below 1 meter this week, meaning barges have to carry reduced loads. Jet tanks in Amsterdam-Rotterdam-Antwerp fell slightly to 808,000 tons on Jul. 14, according to Insights Global, as a tanker discharged from the United Arab Emirates but smaller ships left for the UK and Norway. Tanks are 33% lower than last year but on a par with early summer stocks before the pandemic.

US jet fuel markets are fluctuating at much lower levels following the steep drop in basis diesel futures. Airlines are heading into the third quarter with average spot prices at $3.61 per gallon that are 50¢ below second-quarter rates. Jet fuel spreads have strengthened against the lower ULSD diesel values, with New York Harbor rates trading at 6¢/gallon over the August print on Thursday after reaching parity last week. Los Angeles differentials have narrowed to a 4.5¢ discount to attract more arbitrage cargoes from exporters in Asia, where jet demand remains subdued.

Jet demand plummeted following the air travel surge around the July Fourth holiday, dropping by 437,000 b/d to 1.37 million b/d in the week ended Jul. 8 — its lowest level since early March. At 1.58 million b/d over the last month, fuel consumption is lagging pre-pandemic rates by 10%. Flight cancellations and high load factors have prevented the typical summer lift in fuel usage. A relatively small 48,000 b/d decline in production to 1.6 million b/d widened the supply surplus, pushing up stocks by 1.4 million bbl to 43.1 million bbl. But tanks are still 7% below year-ago rates due to shortfalls on the East and Gulf coasts.

Asian jet markets continued to slide even as overall air traffic rose in regional aviation markets. The benchmark Singapore spot price differential tumbled by 90¢/bbl to a premium of 73¢/bbl to Singapore quotes on Jul. 14 — its lowest level in more than two weeks. Premiums have crashed by 82% since reaching a high of $4.21/bbl to Singapore quotes on Jun. 29. An increase in scheduled airline capacity in the largest regional Northeast Asian market lifted prompt jet demand, offsetting declines in Southeast Asia and South Asia. Scheduled capacity for the week of Jul. 11 rose by 3.3% in Northeast Asia due to a 4% increase in China and 1.5% gain in Japan, according to data analysis firm OAG. Capacity in the Mideast climbed by 1.3% over the same period. But average fuel burn for flights in most Asian countries is limited by shorter-haul domestic routes which dominate those markets. Chinese international capacity in mid-July is still 95% below 2019 levels while Japanese foreign capacity is off by 80%, according to OAG.