Rising jet fuel prices have hit the profitability of airlines, which have begun raising airfares and suspending flights to contain the fallout from the war with Iran, which has more than doubled jet fuel prices over the past month.
Supplies of oil and jet fuel are limited because crude oil and petroleum products are trapped in the Strait of Hormuz, forcing Asian refiners to reduce run rates and Asian countries to restrict or ban exports to preserve domestic supply.
jet fuel crash
The commodity market came under more severe strain than crude oil markets, as the war disrupted oil and fuel supplies and drove up premiums for jet and diesel over Brent to astronomical highs.
Nowhere has the strain been more severe than in fissures and jet fuel prices, signaling a sharp deterioration in prices for airlines and consumers ahead.
Analysts say the specifics of jet fuel production and storage compared to other fuels made the kerosene market the most vulnerable to the significant changes in physical supply seen in recent weeks.
Jet fuel is the most stressed barrel, says June Goh, senior oil market analyst at Sparta Commodities, noting that jet fuel has very specialized tank storage requirements and there isn’t much of it stored around the world, unlike many other products such as diesel and gasoline.
Due to these storage constraints, jet fuel supplies were the hardest hit initially, Goh said late last week.
“There are no alternatives for production or 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 unconditionally opened to all traffic today, 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 has already been done, and it will take months to return to normal, if “normality” could be applied to global oil flows from now on. Until some sort of “normal” return is achieved, the most stressed barrels (jet fuels and diesel) would become even more stressed as Asia reduces refinery operations and exports. while storage, when available, is being aggressively leveraged.
“A global aircraft supply crisis is emerging with no clear relief mechanism,” James Noel-Beswick, Sparta’s head of commodities, said in the commodities analytics firm’s April trading outlook.
The market is signaling “a genuine shortage with limited rebalancing ability” as all major arbitrage windows to Europe and Los Angeles are closed despite extreme prices and US Gulf jet barrels are already maxed out, Noel-Beswick added.
Fatih Birol, 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 already seeing it in Asia, but soon, in April, or maybe in early May, it will reach Europe,” Birol said this week on the ‘In Good Company’ podcast hosted by Nicolai Tangen, CEO of Norway’s sovereign wealth fund, the largest in the world.
Airlines feel the pressure
The shortage of jet fuel supply is impacting Asia Pacific airlines and is already piling pressure on European airlines as well.
Australia’s Qantas raised international fares in early March, becoming one of the first major airlines to raise prices.
Jet fuel prices, which have more than doubled, are driving up costs across the group, despite hedging, Qantas said.
South Korea’s national airline, Korean Air, is now in emergency mode in response to rising 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 are considered shocks and are difficult to adapt to,” IATA said.
Airlines in Asia are already canceling flights, while European airlines are starting to worry about a real shortage of jet fuel through May and beyond.
“We don’t expect any disruption until early May, but if the war continues we run the risk of supply disruptions in Europe in May and June, and we hope the war ends sooner and the risk to supply is removed,” Ryanair CEO Michael O’Leary told Sky News on Wednesday.
Ryanair, one of Europe’s largest low-cost airlines, is “reasonably well covered” for 80% of its fuel, O’Leary said, but noted that it is paying almost twice as much, about $150 a barrel, for the other 20% of its fuel supply.
Meanwhile, Europe’s largest aviation group, Lufthansa, is developing crisis plans depending on the severity of price increases and fuel shortages, and is preparing to ground about 5% of its capacity, or about 40 planes, a company spokesperson told Bloomberg this week.
The jet fuel situation will worsen in the coming weeks, and even if the Strait of Hormuz were unconditionally reopened to all traffic today, it would take months for the oil and fuel markets to return to anything resembling normal.
“The market will continue to tighten,” Edward Morse, commodities strategist at Hartree Partners, told the Financial Times.
By Tsvetana Paraskova for Oilprice.com
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