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Commodities 2021: Asia's jet fuel recovery sees headwinds in 2021, eyes brighter H2

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Singapore — The Asian jet fuel market is set to face renewed headwinds in 2021 as the widespread surge in COVID-19 infections, coupled with new variant strains of the virus has held air travel demand in a chokehold.

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The new variant COVID-19 virus, which is reportedly more contagious, has forced many countries to reimplement rigid travel restrictions, with the latest measures on travelers from the UK, casting further doubts on the recovery of the aviation sector in 2021, industry sources said.

S&P Global Platts Analytics noted that several countries in Asia are experiencing a surge in COVID-19 cases.

"Some [infections] had been linked to a new variant of the virus from the UK which is highly infectious. We expect the resurgence of COVID-19 will continue to stunt the pace of jet fuel demand recovery through the first half of 2021 due to tighter travel restrictions," Lim Jit Yang, adviser for oil markets at Platts Analytics, said.

In Asia, Singapore, Hong Kong and China have quickly reacted to this development and imposed stricter measures including refusing entry to visitors with a travel history to the UK and halting flights from Britain until further notice. In Japan, an increase in the number of COVID-19 cases has forced the country to declare a month-long state of emergency on Tokyo and its adjacent prefectures of Kanagawa, Saitama and Chiba -- roughly 30% of the country's population.

Singapore's health ministry had announced that with effect from Jan. 3, all long-term pass holders and short-term visitors with recent travel history to South Africa will not be allowed entry into, or transit through, Singapore, following reports of a potentially more contagious coronavirus strain circulating in South Africa.

These factors will cast a gloomy outlook on the aviation sector, experts said, derailing previous recovery efforts for the aviation sector.

RECOVERY HOPES IN H2 2021

While the Asian jet fuel complex has started to show some improvements in the last quarter of 2020, with vaccine optimism propelling prices to recoup over 95% of losses since plummeting to historical lows on May 4, 2020, market watchers stressed that the recovery in the aviation sector will become more prominent in the second half of the year with the roll out of the COVID-19 vaccines.

"I think the recovery [in the aviation sector] is under expectations [for now] and actual recovery will likely be in the second half of 2021," a Singapore-based trading source said late. Jan 8, adding that vaccines will require time to be distributed. Once everyone has been vaccinated, international flights will slowly resume.

Platts Analytics echoed a similar sentiment. Lim said that "a more sustained recovery only towards the second half as mass vaccinations begin to take effect". Nevertheless, Platts Analytics still expects Asia's kerosene/jet fuel demand in 2021 to remain close to 20% lower than the level in 2019.

The prompt Q1/Q2 2021 jet fuel/kerosene quarterly spread -- an indication of near-term sentiment -- averaged at minus 82 cents/b throughout December, compared with the average Q3/Q4 spread at minus 47 cents/b, Platts data showed. The Q3/Q4 spread has since narrowed further and was assessed at minus 5 cents at the 0830 GMT Asian close Jan. 8.

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AIRLINES MAINTAIN A TIGHT BELT ON CAPACITY

In light of the pandemic, regional airlines are likely to keep capacity tight, industry experts said, while maintaining the flexibility to adjust accordingly in response to the challenging operating environment. The main focus for most carriers in the new year would be to improve cash flow and profit margins, sources said.

"With less than 60% of global capacity now operating and load factors still hovering around the 50%-60% mark, airlines will not be rushing to add capacity back too quickly. After all, you cannot maximize yields when load factors are not creeping above 75%-80% and once cash flow has been reignited airlines will start looking at profitability as a priority," aviation consultancy OAG said in a Dec. 30 report.

OAG noted that the roll out of vaccines will make a huge difference in terms of travel confidence, protocols and international travel requirements. But the aviation consultant held a more bearish outlook, adding that the impact of vaccines will not be significant on travel before the third quarter of 2021.

While industry experts held differing views on when the aviation industry's flight to recovery will take off, market participants agreed that air travel and jet fuel demand are set to bounce back faster in domestic markets, while the pace for international air travel will remain slower due to border and travel restrictions.

"I think big oil-consuming countries like India and the US will recover [faster] due to higher domestic demand, but international flight demand will need more time," a second refinery source said.

Platts Analytics reported on Jan. 6 that Chinese air traffic has been weakening on rising viral cases and travel curtailment. Europe and the UK air traffic had also shown a notable decline given the rise in COVID-19 cases, reduced travel, and increased restrictions.

"Air traffic in Brazil and India continue to normalize and are well aligned with our expectations of higher jet fuel demand in January for both countries," Platts Analytics added.