Soaring jet fuel prices have hit the profitability of airlines, who have started raising air fares and grounding flights to contain the fallout from the Iran war, which has more than doubled aviation fuel prices over the past month.
Oil and jet fuel supplies are constrained as crude and petroleum products are trapped at the Strait of Hormuz, forcing Asian refiners to cut run rates and Asian countries to restrict or ban exports to preserve domestic supply.
Jet Fuel Shock
The product market came under more severe stress than the crude markets as the war dislocated oil and fuel supplies and sent jet and diesel premiums over Brent to astronomical highs.
Nowhere has the stress been more severe than in jet fuel cracks and prices, signaling acute price pain for airlines and consumers going forward.
The specifics of producing and storing jet fuel compared to other fuels made the kerosene market the most vulnerable to the major shifts in physical supply seen over the past weeks, analysts say.
Jet fuel is the most stressed barrel, June Goh, Senior Oil Market Analyst for Sparta Commodities, says, noting that jet fuel has very specialized tank storage requirements and there isn’t much of it stored globally, unlike many other products such as diesel and gasoline.
Due to these storage constraints, jet fuel supply was the hardest hit at the start, Goh said at the end of last week.
“No alternatives for production and no strategic storage. Some airlines are forced to induce demand destruction. Prices have doubled,” the analyst noted.
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Even if the Strait of Hormuz were to open unconditionally to all traffic today, the global oil production and refining supply chains would take at least three to six months to normalize to pre-war levels, Goh said in an analysis last week.
The damage is done, and it will take months to return to normal, if ‘normal’ could be applied to global oil flows from now on. Until some kind of ‘normal’ returns, the most stressed barrels – jet and diesel fuels – would become even more stressed as Asia reduces refinery runs and exports. while storage, where available, is being aggressively tapped.
“A global jet supply crunch is emerging with no clear relief mechanism,” James Noel-Beswick, Head of Commodities at Sparta, said in the commodity analytics firm’s trading outlook for April.
The market is signaling “a genuine shortage with limited ability to rebalance” as all major arbitrage windows into Europe and Los Angeles are closed despite extreme pricing and U.S. Gulf jet barrels are already stretched, Noel-Beswick added.
Fatih Birol, the executive director of the International Energy Agency (IEA), also noted that jet fuel and diesel are the most stressed barrels in global markets today.
“The biggest problem today is the lack of jet fuel and diesel; these are the main challenges and we are seeing it already in Asia, but soon, in April, or maybe beginning of May, it will come to Europe,” Birol said this week on the ‘In Good Company’ podcast hosted by Nicolai Tangen, the CEO of Norway’s sovereign wealth fund, the world’s biggest.
Airlines Feeling the Pinch
The jet fuel supply crunch is reverberating through Asia Pacific airlines and is already piling pressure on European air carriers, too.
Australia’s Qantas raised international fares in early March, becoming one of the first major airlines to hike prices.
The more than doubled jet fuel prices are driving up costs across the group, despite hedging, Qantas said.
South Korea’s flag carrier, Korean Air, is now in emergency mode in response to soaring costs.
Jet fuel is the highest cost for airlines, and “the most damaging episodes occur when fuel prices rise rapidly, and airlines do not have time to adapt their strategy,” the International Air Transport Association (IATA) said two weeks after the war in the Middle East began.
“Rapid changes qualify as shocks and are hard to adjust to,” said the IATA.
Airlines in Asia are already grounding flights, while European carriers start to fret about a true jet fuel scarcity going into May and beyond.
“We don’t expect any disruption until early May, but if the war continues, we do run the risk of supply disruptions in Europe in May and June, and we hope the war will finish sooner than that and the risk to supply will be eliminated,” Ryanair CEO Michael O’Leary told Sky News on Wednesday.
Ryanair, one of Europe’s biggest budget airlines, is “reasonably well hedged” on 80% of its fuel, O’Leary said, but noted that it is paying nearly double at around $150 a barrel on the other 20% of fuel supply.
Meanwhile, the biggest European aviation group, Lufthansa, is developing crisis plans depending on the severity of the price surge and fuel crunch, and prepares to ground about 5% of capacity, or about 40 aircraft, a company spokesman told Bloomberg this week.
The jet fuel situation will worsen in the coming weeks, and even if the Strait of Hormuz were to re-open unconditionally to all traffic today, it would take months for oil and fuel markets to return to some semblance of normality.
“The market is going to continue to get tighter,” Edward Morse, a commodities strategist at Hartree Partners, told the Financial Times.
By Tsvetana Paraskova for Oilprice.com