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S&P Global Platts — 3 Apr, 2020

Jet fuel demand faces double blow from recession and coronavirus: Fuel for Thought

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By Paul Hickin

The International Air Transport Association has warned that carriers face a near 40% collapse in passenger numbers this year. Once the skies reopen, the likelihood of a global recession and companies cutting back on business travel probably means refiners face a slow recovery to normal demand.

Prices have nosedived. Jet fuel refining margins, as assessed by S&P Global 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, and remains under pressure. 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.

“We have never seen a pandemic coincide with a deep global recession, which is now expected,” IATA chief economist Brian Pearce said. “That will almost certainly mean travel recovery, once travel restrictions are lifted, will delay the recovery.”

Meanwhile, storage tanks are filling up fast with unwanted engine oils. A gasoline glut is also growing as drivers, especially in the road-hungry US, stay at home, adding to the refined products oversupply.

Global refiners are now starting to assess the wisdom of producing more oil-based goods as analysts weigh up when storage could be exhausted.

Transportation fuels accounted for 63% of oil demand last year, according to the International Energy Agency.

However, S&P Global Platts Analytics forecasts world oil demand will be obliterated in April and May, resulting in a decline of as much as 4.5 million b/d in 2020.

This equates to possibly the biggest annual drop as far as meaningful records go.

Eventually, oil demand will limp back to life, but a full jet fuel recovery could take longer as consumers remain reluctant to fly and companies cut back on corporate travel to save on costs.

Consumer behavior impacts

The daily grind of a commute may also be slow to return as a foundation for transport fuel demand.

Platts Analytics’ Scenario Planning Service estimates there is more than 3 million b/d of oil demand in the transportation sector that is at risk by 2040 due to potential coronavirus after-effects that forced people globally to work from home and has hit shopping, aviation, cruises and more.

“We need to consider the possibility that consumer behavior could be altered structurally with longer-term impacts that persist even once the pandemic and economic slowdown have ended,” Platts Analytics said in a report. “Workers forced to work from home for prolonged periods during the crisis may choose to continue doing so, and/or employers may seek to have more of their employees work remotely to save on office space, which would weaken transportation-related oil demand.”

Accounting for 7%-8% of overall oil demand, the health of the global jet fuel market is vital for major producers such as OPEC since it remains most immune to energy transition.

Without a robust recovery in air transport, the cartel faces a prolonged period of weak fundamentals adding to the impact of the price war between Russia, Saudi Arabia and US shale.

The jet fuel market and the wider transportation industry may not look quite the same again.