US jet fuel demand hits blockbuster status

— The US summer movie season has yet to see a true blockbuster, unless you count "Transformers." But new data shows the summer jet fuel demand season has finally reached blockbuster status.

US jet fuel demand for the week ended July 4 spiked 8% to 1.799 million barrels a day for its highest level since November 2007, while stocks plummeted 4% to 35.6 million barrels for the lowest mark since May 2004, according to data released July 9 from the Energy Information Administration.

Both are stark, pre-recession heyday numbers that reflect a robust air travel picture, something US airlines have touted for months. Yet, the supply-demand picture did not mirror that optimism until recently. Demand in mid-June was 3% below year-ago levels. It's now 10.6% above. Inventory in mid-June was flat to last year. It's now 9.4% lower.

Market sources made sense of the conflicting information by noting the airline industry has made huge strides in refleeting efforts, such as meeting passenger demand by replacing small planes with larger planes or more fuel-efficient ones. That allowed capacity to grow without actually growing jet fuel demand by much. In other words, capacity discipline discovered during the recession remained intact despite increased capacity.

It seems that transformation may have been a bit more than meets the eye. More capacity does actually mean more jet fuel demand.

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Product supplied, or implied demand, can be volatile week-to-week, but the recent four-week average also rose sharply, up 99,000 b/d to 1.682 million b/d, highest since November 23, 2007. Still, the data provide further evidence of a rebound in the US airline industry, hit hard by bankruptcies even before the recession. Airlines merged in part to cope with rising jet fuel prices that now account for a third of an average airline's expenses.

The latest merger produced the world's largest airline, American Airlines, which reported Wednesday that it forecast 2014 capacity 3% higher due in part to "larger gauge aircraft replacing smaller gauge legacy aircraft." (It also said it no longer has any fuel hedges on its books, which is another story.)

Capacity growth at American and other global airlines came mostly in international routes, however, and airline stock prices were punished lately across the board as load factors decreased on those routes.

"The concern investors have is that the non-US international airlines will grow into US markets, adding excess capacity and wrecking the fare structure," wrote analyst Helane Becker of Cowen and Co. "Clearly, we are concerned by this scenario, however we believe it is very much overblown."

More insight will come as more US airlines report second quarter earnings in the coming weeks, and also as the EIA rolls out jet fuel data every Wednesday as if it were tallying weekend box office results. This summer may still be a time for blockbusters.