Middle East jet fuel demand set for record drop as COVID-19 restricts travel

Dubai — Middle East jet fuel demand is forecast to tumble by a record amount this year as countries across the region suspend passenger flights that will cost regional airlines some $19 billion in lost passenger revenue in 2020, analysts told S&P Global Platts.

Middle East jet fuel/kerosene demand will fall by 125 kb/d, or 23% year-on-year, to some 420,000 b/d in 2020, which would be the lowest in at least a decade, according to FGE Energy. A drop of 23% would be unprecedented.

"We continue to expect April/May to be the lowest point for demand, falling to an average 245 kb/d, although even this may prove optimistic and actually settle closer to 145 kb/d," Audrey Dubois-Hebert, a consultant with FGE, said. "Either way, these are levels the region has not seen in well over a decade."

Travel restrictions in the Middle East, home to long-haul airlines Emirates, Etihad and Qatar Airways, are expected to cost the carriers $19 billion in lost passenger revenue and lead to a 39% drop in passenger demand in 2020, according to March 24 projections by the International Air Transport Association.

Emirates, the world's biggest long-haul carrier, is among those airlines hurting from the coronavirus outbreak, which has prompted the UAE authorities to temporarily suspend passenger flights, leaving only cargo and emergency evacuation flights operating.

Busiest hub

Dubai International Airport, the home of Emirates, last year retained its title as the busiest hub for international travel, despite a 3.1% year-on-year drop in passenger numbers to 86.4 million, which was partly attributed to the grounding of Boeing's 737 Max aircraft.

Emirates, the biggest operator of A380 super jumbo jets and Boeing's 777, carried 29.6 million passengers between April 1 and September 30 of 2019, down 2% from the year earlier period. The volume of cargo handled was 1.2 million tons, down 8%.

Abu Dhabi's Etihad Airways and Doha-based Qatar Airways are also suffering from the corona outbreak and just like Emirates, they relied on international traffic to fuel their growth over the past decade.

"With airlines culling their schedules, even evoking short-term closures, airports will become ghost towns impacting the many businesses that support the complete air transport supply chain," Richard Maslen, an analyst at CAPA - Centre for Aviation, said. "The big three Gulf carriers will be particularly pressured given that their hub models rely on passengers flying from A to C via their major hubs."

Prices nosedive

Jet fuel and oil prices have nosedived due to the coronavirus epidemic and ensuing travel restrictions.

On the outright price, the FOB Singapore jet fuel/kerosene price was assessed below the minus $30/b mark on Friday at $28.28/b, Platts data show.

The outright price has fallen over 50% from $57.79/b since the beginning of the month, and in the course of the month, the price fell to its lowest of $25.35/b on March 23, 2020. At that level, it marked the lowest level since July 8, 2003 when it was assessed at $27.83/b, Platts data showed.

Further bearishness as a result of the coronavirus pandemic was reflected in the derivative market as the front month April/May Singapore jet fuel/kerosene timespread opened Monday at a steep contango of minus $2.80/b. This marked an 11.5-year low in the front month timespread which was last assessed at this level on September 30, 2008, Platts data showed.

Jet fuel refining margins, as assessed by Platts, have turned negative for the first time ever in Europe.

Platts' front month jet FOB FARAG barge swap crack versus Brent fell $2.43/b day on day to minus 54 cents/b last week. Refining margins or cracks are the difference in value between crude oil and the products produced, with a negative value indicating refiners losing money creating jet fuel.

As airlines grapple with losses, refineries in the Middle East as well will have to alter their operations to reflect the lower jet fuel demand that is unlikely to abate soon.

The average jet fuel yield for Middle East refiners is approximately 17%, according to FGE estimates.

"In the Middle East, like in many other parts of the world, jet/kerosene does not typically take the largest share in refinery output," FGE's Dubois-Hebert said. "We're likely to see refiners shift their yields towards the gasoil/diesel pool, especially if jet cracks continue to slide as they have been recently."

Global Impact

Jet fuel demand in the UAE alone accounts for more than 30% of the jet fuel consumption in the Middle East region and more than 2.5% of the global jet fuel demand, according to S&P Global Platts Analytics. The demand does not include refueling aboard of UAE's international flights. Given the increasing connectivity of UAE's international flights in different regions, the impact of suspending flights will likely dampen the global jet fuel demand more than that to the ME regional demand, according to Platts Analytics.

"Demand could drop further if governments/airlines put more stringent measures in place," Dubois-Hebert said. "As a transit hub, the Middle East will need both the European and Asian markets to have recovered before we see any real upside to jet fuel demand."

All of these measures will dent Middle East oil demand, which is forecast to drop to 9.57 million b/d in 2020 from 9.83 million b/d in 2019, according to Platts Analytics.

(Updates with jet fuel prices.)