Analysis: India delaying flight restart to weigh on jet fuel demand

Singapore — India has deferred the resumption of international commercial flights until July 31 from its previous announcement of July 15 while also curtailing some domestic flights, marring the prospects of an aviation recovery in the world's second most populous country, and a major jet fuel consumer and exporter.

The delay comes at a time when the coronavirus pandemic has severely restricted movement of people globally, including for air travel, and slowed down economies, bringing some to a grinding halt.

Extending the ban would give India more preparation time before allowing international flight operations, according to local media quoting senior Indian government officials.

On the domestic front, flights into Kolkata in eastern India have also been curtailed by the aviation ministry. The Kolkata airport authority said in a tweet on July 4: It is informed that no flights shall operate to Kolkata from Delhi,Mumbai, Pune, Nagpur, Chennai & Ahmedabad from 6th to 19th July 2020 or till further order whichever is earlier.

India has now surpassed Russia as the third highest country in the number of COVID-19 cases. As of 0330 GMT July 7, infected cases in India stood at 697,413, and the death toll at 19,693.

Refiners opt for gasoil

The drop in passenger traffic left little choice for Indian refineries but to maximize gasoil output over jet fuel, industry sources said July 6.

Chennai Petroleum Corp. Ltd., for one, slashed its run rate to 30%-35% during the lockdown period by shutting two of the three crude distillation units. Its refining margin also fell into negative during the two-and-half month lockdown period, S&P Global Platts reported. Its Manali refinery, like other state-run refiners, had invoked force majeure to its suppliers in the Middle East for crude cargoes scheduled for May delivery. In March, the refinery's run rate stood at 96%, but fell to 36% in May.

"Demand [for jet fuel] is still weak, there is no incentive for refiners to run at high rates and end up holding unwanted jet [barrels]," a Singapore-based refining source said.

Asian gasoil demand has picked up at a much faster rate compared with its codistillate.

Middle distillate traders previously said gasoil has proved to be a fairly resilient product thanks to its many varied uses in different sectors, such as transportation, construction, industry, power generation, and agriculture, while jet fuel is mainly channeled toward the aviation sector.

"For refiners now, of course, they prefer to produce gasoil over jet," a north Asian trading source said July 7, adding that "unless international traffic recovers, future of jet consumption is hopeless."

Demand to stay subdued

Since the resumption of domestic operations May 25, aviation demand in the country has been lesser than expected, and passenger traffic averaged just 70,000 daily passengers in June, marking a year-on-year decline of around 80% from 400,000 passengers over the same period in 2019, said consultancy firm Centre for Asia Pacific Aviation, or CAPA, on July 4.

CAPA India predicts a bearish near-term outlook, adding that demand will remain "very subdued" until at least the end of the second quarter of 2021. "With the number of daily new COVID cases in India accelerating, consumer confidence is weakening," CAPA said.

"The onset of monsoons has also impacted travels," a refining source said. India's monsoon season usually runs from June to September.

CAPA added that while international operations may resume later in August, it is not expected to reach any meaningful scale.

According to latest data late June from the country's Petroleum Planning and Analysis Cell, or PPAC, India's jet fuel production in May was registered at 372,000 mt, falling 152,000 mt, or 29%, month on month to a 10-year low as domestic refiners slashed output to combat dwindling demand amid the pandemic. This marked the fourth consecutive month-on-month decline, and also an all-time record low in jet fuel production, according to PPAC historical data that stretches back to April 2010. Meanwhile, jet fuel consumption was at 111,000 mt in May, plunging 84% year on year, PPAC data showed.

India raises jet prices

Despite tepid demand, India hiked prices of jet fuel -- called Aviation Turbine Fuel, or ATF -- by 7.5% on July 1 for the third consecutive time, local media reports showed.

ATF prices soared by Rupees 2,922.94/kiloliter ($39/kiloliter) to Rupees 41,992.81/kiloliter in the national capital region, the Times of India reported in early July.

According to industry sources, the rise in domestic prices was in tandem with international rate increases for the aviation fuel. Jet demand elsewhere has seen a gradual pickup as more airlines add to flight capacities.

Evidencing this, the FOB Singapore jet fuel/kerosene outright price has trended higher, and was assessed at $43.79/b at the 0830 GMT Asian close July 6, marking a 88 cents/b rise day on day. In the derivatives market, the front-month August-September timespread narrowed 6 cents/b day on day at minus 72 cents/b July 6, Platts data showed.