It has become something of a cliché to say that the coronavirus pandemic will change the way we live – forcing our societies to rethink everything from voting to education – but that doesn’t make it any less true.
For traders and brokers in the oil patch, changes to travel habits are front of mind, with domestic road trips likely to supplant international air travel as the preferred way to vacation this summer.
This is a major U-turn from recent years, when a growing global economy and rising personal incomes, especially in Asia, had passenger airlines moving more tourists around the world than ever before.
Delta and United Airlines, two major US carriers, reported their first quarterly losses in more than five years, after intentional tourism came to a screeching halt, leading to an unprecedented drop in global flight capacity.
For those of us stuck at home but still clinging to the hope of a summer holiday, road trips in cars and trucks have rarely been so affordable, as stocks of ultra low sulfur diesel (ULSD) and gasoline around the world have piled up during the virus lockdown.
In my home town of Los Angeles – typically one of the most expensive gasoline markets in the country – the S&P Global Platts assessment for regular California grade gasoline hit 79.37 cents/gal on the last day of April, about a 54% drop from the start of the year and roughly 68% lower than a year earlier.
The latest research from S&P Global Platts Analytics shows that US driving seems to be recovering at a faster rate than driving in Europe, as indicated by the latest Apple Mobility data. This in turn helps explain why US gasoline prices are now rising faster than European prices.
Platts assessed waterborne US Gulf Coast 87 octane CBOB – the most liquid gasoline grade in the US – at an outright price of 81.70 cents/gallon on May 14. That represents an increase of about 133% since the assessment hit its nadir for the year during the COVID-19 pandemic.
Benchmark Northwest Europe 10 ppm sulfur gasoline cargoes were assessed on May 14 at $254/mt, about an 79% increase from the assessment’s low point since the outbreak of coronavirus. Platts assessed benchmark ULSD barges – a popular road fuel in Europe – at their lowest level on record on April 27 on an Amsterdam-Rotterdam-Antwerp barges basis.
Market sources in the US and Europe have said that ULSD demand has been less affected by coronavirus as compared with gasoline since trucking, agriculture and other essential economic activities have continued despite the ongoing virus lockdowns.
In fact, many of the US refineries which are normally engineered for maximum gasoline creation, have been reconfigured to create more ULSD, which has seen margins remain in positive territory since the outbreak. This explains why US stocks of total distillates are now at their highest level in years, according to the US Energy Information Administration.
Cocooned in cars
Based on those fuel prices, and common sense, European distillates market source are predicting that this is the summer that international air travel takes a back seat to road trips. Traders believe that even after most other areas of life return to normal after coronavirus, international air travel and open borders for tourists will take time to reopen.
One market source living in Switzerland encapsulated the current situation: “Everyone I talk to is clearly in need of a holiday, if for no other reason than to leave their homes. My personal prediction is that driving will replace flying as the main to travel.”
He continued: “I was planning to vacation in Croatia this summer and have already rebooked a hotel for the other side of Switzerland instead. Hearing that in China – the first market hit by coronavirus – domestic inland travel already increasing massively.”
Perhaps most important of all, many of us will likely prefer automotive travel as safety concerns about coronavirus linger long after travel bans are lifted, irrespective of the economics.
One of my Platts colleagues in London tells me that when she next returns to her native country of France, she plans to drive, regardless of either the availability or price of plane and train tickets: “This will be safest for my parents,” she said, adding that public transport and aviation seem to be two of the main conduits spreading coronavirus.
This take on air travel mirrors the findings of a survey from global airline industry group IATA, which found that even after the coronavirus is contained, nearly 50% of travellers plan to wait a month or two before flying, while 28% said they would wait six months or so. A mere 14% of the travellers surveyed from 11 different countries said they would not hesitate to fly as soon as they are allowed.
Many traders will tell you that demand for road fuels will most likely recover faster than jet demand this year, a view supported by Platts Analytics’ forecasting.
Platts Analytics says that in absolute terms, gasoline demand has taken the biggest hit from coronavirus, with jet fuel seeing the greatest demand drop in percentage terms this year. “However, we do expect gasoline demand decline rate to moderate in Q3 and its growth turn to positive in Q4 as – this is our main assumption – people will prefer to drive their own car rather than riding mass transit on COVID-related safety concerns,” according to a report published April 30 [Italics added for emphasis].
“In 2021, aviation demand will still be well below 2019,” according to Platts Analytics, which says it is possible that coronavirus will forever alter both the way we travel and our need for oil.
Looking ahead to the year 2040, Platts Analytics says that more than a cumulative 1.75 million b/d of oil demand could be lost to reduced capacity in the aviation sector. Taking into account broader changes in behaviour, Platts Analytics estimates that by the same year, greater prevalence of working from home and shopping online could create a potential loss of oil demand amounting to 1.9 million b/d.
Tourism treaties and travel quarantine
For their part, airlines have said it could be years before international flight capacity returns to pre-pandemic levels, but that does not mean tourism will hit a brick wall. Countries that rely on tourism will no doubt explore creative ways to bring outsiders into the country. For example, the Association of Czech Travel Agencies recently suggested that the Czech government could sign a treaty with nearby countries that have contained the virus to reopen land borders for tourists.
In France, authorities at the Elysée Palace say that new rules are coming and visitors from the EU, UK, and the Schengen area will no longer have to self-quarantine when they arrive, seemingly contradicting guidance from France’s Ministry of Health, but nonetheless welcome news for travellers.
While it is too early to tell if ideas like these will find support from health experts, governments or the general public, if they do gain traction, the smart money will be betting that those tourists will not be arriving via the airport.
A version of this column was published in S&P Global Platts Oilgram News.