Economic uncertainty dampens the outlook for jet fuel demand

In June, the global oil market looked set for a revival, supported by promising growth in demand for jet fuel. The International Air Transport Association (IATA) has forecast passenger numbers to hit a record high this year, raising hopes of a robust recovery for the beleaguered aviation sector. At the time, Oilprice.com highlighted the potential for increased demand for jet fuel to boost oil prices, painting an upbeat picture for oil and gas industry stakeholders. Additionally, a June 21 analysis from JPMorgan confirmed that global jet fuel demand has surpassed pre-pandemic levels, signaling a return to form for one of the most critical segments of oil consumption.

However, the optimism of mid-2024 has been tempered by recent developments. Airline operators and travel companies are expressing growing concern about the impact of falling disposable incomes on consumer spending and air travel. This, together with a decline in global trade, has led to a reassessment of the sector’s outlook.

jet fuel, the fourth most used petroleum product in the United States, it averaged about 1.56 million barrels per day (b/d) in 2022, accounting for about 8% of total oil consumption, according to the US Energy Information Administration (EIA). This underscores the importance of the health of the aviation sector to the overall oil market. The current stagnation in jet fuel demand raises red flags about a potential broader oil demand disappointment.

Globally, demand for jet fuel averaged 7.49 million barrels per day this year through July, according to Goldman Sachs data cited by Reuters. That’s up 500,000 bpd from the same period last year. For the rest of the year, Goldman expects that to fall to a 400,000 bpd rise year-on-year. But that figure means 2024 will be a disappointment compared to Goldman’s full-year forecast for an average of 600,000 bpd — a figure that will be impossible to reach unless demand for jet fuel picks up in the second half of the year.

One factor contributing to the poor outlook for jet fuel is improving aircraft fuel efficiency. The International Energy Agency (IEA) noted in April that demand for jet fuel and kerosene lagged global miles flown. This discrepancy is largely due to advances in fuel efficiency technologies that allow airlines to operate on less fuel per mile. So despite air traffic surpassing pre-pandemic levels, growth in demand for jet fuel has not kept pace.

The ramifications of this efficiency-based decoupling are twofold. On the one hand, it is a positive development for airlines that want to reduce operational costs and reduce their carbon footprint. On the other hand, it presents a challenge for oil producers and refiners who now face a potential permanent reduction in one of their key markets. The IEA, which has been criticized for what it described as an overly bearish outlook for oil demand and perhaps too optimistic for the speed of the energy transition, suggested that this jet fuel trend could persist, potentially limiting growth in jet fuel demand. planes. even as air travel continues to recover.

But this efficiency is only one piece of the puzzle. The current economic climate is putting additional pressure on the aviation sector. With inflationary pressures eroding consumer spending power, discretionary spending such as air travel is affected. This is of particular concern for long-haul and international travel, which are more sensitive to economic downturns. At 0.3 percent in the March-May period, average growth in U.S. consumer spending is the slowest increase in more than a year.

The result? Airlines are cutting growth forecasts and tempering capacity expansion plans, and oil demand is sure to be hit.

Jet fuel is a major driver of global oil demand, and any sustained weakness in this sector could have ripple effects throughout the industry. Refineries may be forced to adjust their production strategies to compensate for reduced demand for jet fuel, and just the fear of a possible reduction in global oil demand could have a profound effect on global oil prices and futures.

The jet fuel demand situation is exacerbated by the broader challenges facing the global economy. Geopolitical tensions, supply chain disruptions and changing trade patterns are all contributing to a sense of uncertainty already affecting the oil market. The recent decline in jet fuel consumption is just one piece of a larger puzzle facing industry players as they navigate this complex landscape.

The recent slowdown in global jet fuel consumption is a stark reminder of the challenges the oil and gas industry continues to face in a post-pandemic world. The initial recovery in jet fuel demand may have come as a welcome relief to the oil industry, but the recent decline is giving the market cause for concern.

By Julianne Geiger for Oilprice.com

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